Ulta Beauty (NASDAQ: ULTA) shares have been unusually volatile in 2020, with returns for the year ranging from robust 20% gains to losses of over 40%. Those swings reflect investors’ uncertainty about the business, which has had its strong growth record threatened by consumer shopping changes in response to the COVID-19 pandemic.
On Thursday, Aug. 27, the retailer’s second-quarter earnings results should go a long way toward answering some of the big growth questions that were raised in its last report.
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Another tough sales quarter
Ulta’s fiscal first quarter was brutal, with comparable sales diving 35%, thanks to widespread temporary store closures in March and April. Customer traffic fell even harder, but the beauty products giant was able to offset some of those declines by leaning on its digital selling channel. E-commerce sales more than doubled year over year.
That niche likely supported the business in Q2, as did the store reopenings that have brought almost all of Ulta’s locations back on line since May. However, investors aren’t expecting a sharp rebound for the business. On average, analysts estimate that sales fell by about 25% this quarter, to $1.24 billion. Earnings could drop to around $0.14 per share compared with $2.76 per share a year ago. Ulta’s growth will continue to be impacted by reduced customer traffic as shoppers avoid in-person shopping. Fewer opportunities for social interactions will further hamper demand for beauty products in general.
Two consecutive quarters of sales declines exceeding 20% would pressure any business’s earnings, so investors are eager for updates on a few of Ulta’s key financial metrics. Operating margin likely improved compared with last quarter’s -9%, while remaining well below the 12% result Ulta managed in fiscal 2019.
Look for CEO Mary Dillon and her team to discuss broader pricing challenges in the industry, which may keep gross margin lower at least through 2020. Investors should also pay attention to operating cash flow, which landed at negative $24 million in the first quarter, compared with over $270 million a year earlier.
The bigger questions are around Ulta’s long-term growth potential and whether COVID-19 has put a permanent dent in its prospects. The industry is likely to struggle at least through the end of the year, and the management team admitted as much when it announced that it’s slowing store expansion plans to a crawl for the rest of 2020. There’s also an open question as to how eager shoppers will be to return to a hands-on, explore-and-play shopping experience that had been one of Ulta’s core competitive advantages.
Dillon said in June that management still sees room for as many as 1,700 stores in the U.S., compared with the current level of just under 1,300. The pandemic might even create some attractive real estate opportunities as new retail space becomes available. But Ulta will need to get back to sustainable, profitable growth in its existing locations before it can convincingly target an expanding store footprint. Thursday’s report should show a modest first step in that long process.
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