Ulta BeautyULTA

Key highlights

• Profitability outlook rising: Management raised its full year profit forecast to between $28.36 and $28.80 per share, up from the prior range of $28.05 to $28.55. This signal of confidence follows a quarter where operating income, the money left after paying for business costs, grew 11.6% to $448.3 million.
• Store traffic and spending up: Comparable sales, a measure of performance at stores open at least a year, grew 5.3% compared to 2.9% a year ago. This growth was fueled by customers spending 3.7% more per visit and a 1.6% increase in the total number of transactions.
• Gross margins expanding: Gross profit rose to 40.1% of sales from 39.1% last year, largely because the company lost less money to inventory shrink, which is the value of products lost to theft or damage. This improvement helped offset a 14.6% rise in overhead costs related to the recent purchase of luxury retailer Space NK.
• Aggressive share buybacks: The company spent $555.0 million to buy back 958,323 shares of its own stock during the quarter, which increases the ownership stake of remaining shareholders. There is still $1.3 billion left in the current buyback plan to continue this strategy.
• Inventory levels climbing: Merchandise inventory rose 12.5% to $2.4 billion to support new brand launches and the addition of 70 new stores over the last year. While higher inventory uses cash, it ensures the company can meet demand across its growing footprint of 1,608 total locations.

Our take: A very strong quarter that shows the business is managing its costs and theft issues better than expected. While many retailers are struggling with shoppers spending less, Ulta grew both its store traffic and the average amount each customer spent. This performance combined with a raised profit outlook suggests the company's grip on the beauty market remains firm.