In an ugly quarter for retailers, Ulta's story is a thing of beauty

Key Points
  • Ulta's same-store sales — a metric closely watched by Wall Street — rose 14.3 percent for the latest period.
  • Meanwhile, the beauty supplier's digital sales grew an impressive 71 percent in the first quarter.
  • Ulta now expects its full-year comparable sales growth to fall within a range of 9 to 11 percent and its fiscal 2017 e-commerce revenue growth to be in the 50 percent range.
Ulta Beauty beats on bottom line
Ulta Beauty beats on bottom line

Ulta Beauty just reported what many are calling another stellar quarter.

The beauty retailer continues to outshine struggling peers by doing a few key things right — drawing millennials to its stores, growing an impressive e-commerce business, playing up brand partnerships and rolling out fun and innovative product lines.

"We think the market continues to drastically underestimate the duration of growth for this better-mouse-trap, category-killer retailer," Evercore ISI analyst Omar Saad wrote in a note to clients.

"Ulta has decisively won the trust and reliance of essentially all the top brands in the beauty industry, and the company still has a significantly undersized store footprint," Saad continued.

Shares of Ulta's stock were climbing by more than 4 percent Friday morning, on the heels of the retailer's celebrated first-quarter earnings beat.

While most headlines tell the tale of retailers struggling to grow foot traffic at brick-and-mortar locations, Ulta is proving it knows how to buck the trends.

The retailer's same-store sales — a metric closely watched by Wall Street — rose 14.3 percent for the latest period, a healthy double-digit jump at a time when many businesses are barely eking out 1 to 2 percent growth.

Ulta attributed the gains to 8.7 percent transaction growth at its established stores and a 5.6 percent uptick in the average shopper's ticket.

"We're particularly proud of these results in light of the challenging environment many retailers are experiencing," CEO Mary Dillon said on the earnings conference call.

And Ulta isn't just focused on its physical stores, either.

The beauty supplier's digital sales grew 71 percent in the first quarter, to $104.3 million from $61 million, contributing 340 basis points to the overall 14.3 percent increase in comparable sales, Ulta said.

"I would say we're probably benefiting from some newer digital marketing tools that we implemented last year," Dillon said. "So — paid search, display advertising, paid social — those are all building momentum to really drive traffic, so that certainly has benefited our e-commerce business."

Ulta now expects its full-year comparable sales growth to fall within a range of 9 percent to 11 percent, with its fiscal 2017 e-commerce revenue growth to be in the 50 percent range.

"Importantly, Ulta said the strong online sales are largely incremental to its brick-and-mortar business, with 8.6% of loyalty members now shopping across all channels," Stifel analyst Mark Astrachan wrote in a note to clients.

"While e-commerce remains a drag on total company gross margin, Ulta said the gap between brick-and-mortar and online operating margins has narrowed substantially, reflecting the benefits of Ulta's supply chain investments and lower labor costs."

There are very few Ulta customers who only ring up purchases on the website, Dillon told analysts and investors, adding that this trend is "great for [Ulta's] business longer term because... omni-channel shoppers are [Ulta's] best guests."

Contributing to this argument, Evercore's Saad wrote that Ulta's e-commerce acceleration of late isn't "coming at the expense of physical store visits."

As Ulta's physical and digital presences continue to show some overlap, the retailer is strengthening its partnerships with beauty brands like Estee Lauder and MAC Cosmetics across all channels.

On Thursday, Ulta reiterated its plans to open 700 combined "prestige brand boutiques" for popular makeup nameplates like Lancôme, Clinique, Benefit and MAC before the year is over, on top of the 500 beauty boutiques Ulta launched in 2016.

Meanwhile, Ulta placed 600 additional MAC products on its website in mid-May, saying Thursday the company has been encouraged by early results of this launch.

"The notion of continuing to have a wonderful shopping experience with a great assortment of products and categories and brands, plus services, plus the ability to have a great online experience... we see a plenty of runway for us to continue to be a very relevant both bricks-and-mortar and online player," CEO Dillon said.

"The uniqueness of our business model is that we're in a category that's certainly growing, but as we look at demographic trends and we look at millennials and Gen X and Latinos, all fast-growing sectors of our economy, these are all folks who really are engaged in beauty."

On Thursday, Ulta reported adjusted earnings per share of $1.91 on sales of $1.32 billion. Analysts were expecting the company to post earnings of $1.80 a share, adjusted, on revenue of $1.27 billion.

For the fiscal year 2017, Ulta now expects to deliver earnings-per-share growth in the mid-20s percent, the company said, compared to a previous outlook in the low 20s. Ulta has plans to open 100 net new stores, remodel 11 locations and relocate six by the end of the year.

As of Thursday's close, shares of the beauty supplier have climbed more than 37 percent over the past 12 months and are up about 15 percent for the year-to-date period.

ULTA 12-month performance

Source: FactSet