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Ulta Beauty Looks to Close Out 2018 With a Bang

Demitrios Kalogeropoulos, The Motley Fool

Investors are looking forward to Ulta Beauty's (NASDAQ: ULTA) upcoming fiscal fourth-quarter earnings report, which is due after the market closes on March 14. The spa and beauty products retailer could have some good holiday-season growth and profit numbers to announce, given the improving industry trends. Shareholders are also eager to find out whether CEO Mary Dillon and her team still see good reasons to slow down their store expansion pace as they look ahead.

Growth rebound

The growth outlook is bright for Thursday's report, which covers the November-through-January period. After all, Ulta announced healthy sales gains for the prior quarter back in early December, when its 8% spike reflected its first growth acceleration in nearly a year.

A woman applies face cream.

Image source: Getty Images.

Its booming e-commerce business played a key role in that fiscal Q3 performance, but Ulta also noted strong gains in customer traffic and average spending. Since then, most major retailers have reported healthy growth for the holiday period, so conditions seem ripe for Ulta to extend its positive sales momentum.

For its part, management had targeted fiscal Q4 sales of $2.1 billion and a comps boost of between 7% and 8%. Hitting that goal would put full-year growth at around 7% compared to 11% in the prior year, but the slower gains should still translate into higher market share.

Margin pressures

Two big factors have been pressuring Ulta's profitability lately. First, there's been an industry-wide demand slowdown that forced many companies, including Ulta, to cut prices to keep customer traffic flowing. There's also a sharp tilt toward the online business, which right now isn't as profitable as the retailer's physical store network.

The e-commerce challenge is one that management welcomes since it shows that the brand is resonating well in that competitive niche. Digital sales should reach nearly 15% of its total this year, racing past the company's earlier goal of crossing 10% in 2018.

The good news is the company entered the holiday period with lean inventory levels thanks to the aggressive promotions management ran in the prior quarter. That short-term pinch should have helped support profit margins over the competitive holiday season, and investors can judge that success by following operating profitability. Executives' latest forecast called for that figure to fall by less than 1 percentage point for the full fiscal 2018.

Looking ahead

Ulta's earnings report should also include management's first detailed outlook for 2019, and that forecast will answer a few big questions for investors. Most importantly, its sales growth prediction should indicate whether the company is primed for a rebound this year -- or set for another year of decelerating gains. Dillon will likely comment on management's long-term store expansion plans, too, given that they recently scaled back on their proposed new store openings for 2019 and 2020.

Ulta's business can still produce robust earnings growth even as its rate of new store launches slows to around 75 annually from 100 in recent years, especially as online transactions march toward 25% of the sales base. Still, investors will want to see evidence that the company can reach its long-term target of as many as 1,700 locations compared to the roughly 1,200 open today. The best indicator of that will be steady or accelerating sales growth at Ulta's existing spa centers.

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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.