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Ulta Beauty Earnings: What to Watch

Demitrios Kalogeropoulos, The Motley Fool

Investors have been happy with Ulta Beauty's (NASDAQ: ULTA) last few earnings reports as the spa and beauty products retailer achieved robust sales growth and improving profit margin while setting its sights on international expansion.

That success has led to a dramatic outperformance for the stock, but the gains raise the stakes for management to show continued positive momentum in the company's upcoming earnings report.

With that backdrop in mind, let's take a closer look at Ulta's second-quarter announcement, set for Thursday, Aug. 29.

A customer makes a purchase at the checkout counter.

Image source: Getty Images.

Slower but steady growth

The prestige segment of the cosmetics industry is still weak, and that fact pressured growth in recent months. Yet Ulta executives were still happy with the 7% comparable-store sales increase the company achieved last quarter, which reached the high end of management's guidance for the full year.

On Thursday, investors are expecting another boost at about the same pace. Looking beyond the headline figure, shareholders are hoping to see another balanced growth result that includes both higher customer traffic and increased spending per visit.

Ulta's store growth expansion is just as important, with 89 new location launches over the past year helping overall sales rise 13% last quarter. CEO Mary Dillon and her team will likely update investors on that expansion project on Thursday, including comments on the early returns from its latest crop of stores.

Steady profit margin

CFO Scott Settersten said in late May that the company is taking a leaner approach to inventory holdings that seeks to avoid the type of product-clearing promotions that pushed profitability lower last year. If it succeeds, this strategy will boost efficiency and support the company's first year of rising gross profit margin since 2017. However, Ulta runs the risk of hitting inventory shortages and losing out on sales or harming the customer shopping experience.

That's why investors are hoping to see a modest uptick in operating margin this week that doesn't involve a trade-off of lower sales growth.

Updated outlook

Investors are due for some important updates on the business this week. With more than half of the fiscal year behind them, Dillon and her team will have a good idea of their odds at hitting growth and earnings targets. As they stand today, these predictions call for sales at existing stores to rise by between 6% and 7%, down slightly from last year's 8% rise. Ulta aims to add to that growth with the launch of 80 new stores in 2019, which also constitutes a slowdown from the 100 additions shareholders have seen in each of the previous two years.

At the same time, while it is still early in the consumer products retailer's international expansion strategy, executives might have more details to reveal about the company's move into Canada. At the moment, the only concrete data investors have about this project is that it will pinch earnings in 2019 before beginning to lift sales in 2020 and beyond.

This quarter (and in the next few reports) investors should start learning about the size of the sales lift that Canada represents as the first step toward a wider global store network. Success in these new geographies could significantly change management's estimation of Ulta's wider market opportunity that currently sits at an eventual 1,700 stores in the U.S., up from around 1,250 today.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Ulta Beauty. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com