Ulta Beauty (NASDAQ: ULTA) recently released had its fourth-quarter 2019 and full-year earnings, sending shares up over 8% the next day. The climb came as a result of revenue and earnings beats, along with solid guidance for the upcoming year.
Ulta's competitive strength as a beauty retailer for everyone was a key driver of its results. Ulta's assortment ranges from low-priced mass cosmetics all the way toward high-end prestige brands, all under one roof and all tied together with a best-in-class loyalty program. This quarter showed all the benefits of that positioning.
Of course, no one exemplifies mass appeal better than the Kardashians. Last quarter, Kardashian clan member Kylie Jenner premiered her Kylie Cosmetics makeup line, which had previously been a digital-only brand, at Ulta. The fourth quarter was the first full quarter where Kylie Cosmetics were in Ulta stores.
While management says that the single brand wasn't the only or even the main factor in Ulta's better-than-expected quarter, the timing sure is a coincidence. Here are some of the more granular numbers behind Ulta's earnings beat and why one small brand can have such big secondary impacts, especially at Ulta.
Ulta delivered a big earnings beat. Image source: Getty Images.
The primary driver behind Ulta's stock's surge was likely its robust 9.4% same-store sales growth, which is the metric many retail investors look at in assessing the trajectory of a business. Ulta's 9.4% comps would be the envy of just about any brick-and-mortar retailer, but what was even better is that it marked an acceleration from the third quarter's mark of 7.8%. Any retailer with high and growing comps is bound to get a boost in the market.
25.1% e-commerce growth
Of the 9.4% comps, 240 basis points came from e-commerce. Just as Kylie Cosmetics and other brands like Morphe and James Charles were digitally native brands that were later featured at Ulta, Ulta itself has become more digital recently, investing in more of its own fulfillment centers and expanding its e-commerce capabilities.
In the quarter, e-commerce comps were up 25.1% year over year, which was quite strong considering that e-commerce sales were up 50.4% in the prior year's quarter. Ulta is also transitioning an existing fulfillment center in Illinois to e-commerce only and investing in a new e-commerce-only fulfillment center in Jacksonville. Clearly, Ulta sees more and more momentum for e-commerce, although its stores continue to see increased traffic as well.
31.8 million Ultamate Rewards members
Behind all of these growth numbers is Ulta's "secret sauce" -- its Ultamate Rewards program, which gives members customized discounts for loyalty and repeat purchasing. This may in fact be where Kylie Jenner's influence becomes most apparent -- not just in the individual Kylie Cosmetics sales but also in driving more traffic and awareness to Ulta's stores and to Ultamate Rewards.
The Ultamate Rewards program reached 31.8 million members in Q4, a year-over-year increase of 14.4%. That's pretty stunning growth for a company of Ulta's size and scale. These new signups have a good chance of becoming loyal customers in the future, which bodes well for Ulta's financial outlook.
In addition, Ultamate's Elite Diamond tier, which the company introduced last year to service Ulta's biggest spenders, also saw better-than-expected results last quarter. CEO Mary Dillon gushed, "We are pleased to see the number of guests that attained Diamond level was ahead of plan, with very high guest engagement."
While the Kylie Jenner line might have had all of these beneficial secondary effects, such as driving traffic and Ultamate Rewards signups, the Kylie Cosmetics collection at Ulta was actually relatively small, with just 28 SKUs (stock keeping units). That's a fairly small number of products, and the line was sold out of many stores by the end of the quarter. Still, as Ulta's figures show, that small number can lead to big results.
Dillon remarked, "Brand awareness showed momentum across all generations, with particular strength among Gen X and Gen Z shoppers, as well as progress with our Latinos and African-American beauty enthusiasts." Dillon also pointed out strength among new products introduced in the last year, in particular the hot digitally native brands that first appeared in stores.
The flywheel in motion
Ulta seems to have achieved what companies refer to as the "flywheel" -- a virtuous circle that retailers hope to attain. Ulta's business model of wide selection all under one roof feeds its loyalty program, which in turn attracts big brands to its stores. New products and brands lead to more interest, which in turn fuels more rewards member signups. Ulta's flywheel seems to be rolling along quite nicely, so it's no surprise to see the stock up after earnings.
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