Ulta Salon, Cosmetics & Fragrance Inc. Beats Expectations and Raises Its Outlook

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Ulta Salon (ULTA -2.77%) announced quarterly earnings results on Aug. 25 that surpassed even management's high expectations. Sales and profits both grew by more than 20%, and the company boosted its full-year outlook for the second straight quarter.

Here's how the big-picture results stacked up against the prior year:

Data source: Ulta financial filings. YOY = year over year.

What happened this quarter?

Booming demand for Ulta's beauty products and services was most evident in the company's impressive customer traffic gains. Traffic grew 10% at existing locations, marking just a small slowdown from the prior quarter's 11% boost.

Here are other key highlights of the quarter:

• Comparable-store sales rose 14%, outpacing the 11% target that executives had set for the full year. Comps nearly matched the 15% growth logged in the previous quarter that had set a new all-time record for the company.
• E-commerce growth accelerated sequentially to a 55% pace from 39% and was responsible for nearly two percentage points of the beauty retailer's total comps growth.
• Gross profit margin rose to 36% of sales from 35% a year ago.
• Expenses are up -- Ulta directed 22% of revenue toward running the business, compared to 21% last year.
• The rising costs offset improving gross profits, holding operating profits steady at 13.5% of sales.
• The company opened 24 new locations to push its footprint to 907 stores.

What management had to say

"The Ulta Beauty team achieved another quarter of excellent top and bottom line performance, while making significant progress on many elements of our growth strategy," CEO Mary Dillon said. "Our second quarter results reflect a strong pipeline of newness and innovation in merchandising, progress in growing our brand awareness, major milestones related to our loyalty program, continued rapid growth in our e-commerce business, and successful execution of our supply chain investments." 

As for the increased spending, executives said that it came mainly from increased employee count to support these growth initiatives but also included a one-time impairment charge related to store closures.

Looking forward

For the second time this year, Dillon and her team raised their 2016 sales and profit outlook. Comps are now projected to rise 12% at the midpoint of guidance, above the 11% they projected last quarter and even further from their original 9% target. Those gains are expected to be complemented by a store base that is growing by roughly 11%.

Their 2016 earnings target is following a similar trajectory. Ulta began the year predicting 19% higher profits before raising the forecast to the "low twenties percentage range." This week, the projection ticked up again to include "mid-twenties" percentages.

Investors apparently wanted to see an even more impressive outlook, as the stock fell 2% in after-hours trading immediately following the release and has continued its decline on Friday. Yet the sell-off was likely a reflection of the high expectations that shareholders have developed around Ulta's booming business.

The stock had risen about 30% in the past three months, after all, to a valuation of over 50 times trailing earnings. That valuation makes Ulta one of the most expensive retailers around, but its market-thumping growth helps explain why investors are willing to pay such a high premium for the stock.