Margarita M. Phillips 
Ulta Beauty (NASDAQ: ULTA) has some big questions for investors to answer this week. On Thursday, December 2, the beauty and spa services giant will announce its fiscal third quarter results while issuing a global outlook for the key holiday shopping season ahead.
Wall Street is optimistic about the chain’s outlook for closing 2021 on a strong note despite challenges from rising costs and supply chain bottlenecks. But it’s less clear how Ulta will succeed in an increasingly digital sales landscape given its traditional strength in helping customers experience beauty products before they buy them.
With that big picture in mind, let’s take a look at three metrics to watch out for in Ulta Beauty’s upcoming earnings report.
Image source: Getty Images.
1. Rebound acceleration
Three months ago, Ulta surprised investors by revealing accelerating demand growth in the beauty industry. Sales jumped to $ 2 billion from $ 1.2 billion a year ago and $ 1.7 billion during the same period in 2019. This success was fueled by generally strong selling conditions, but also by a faster rebound in the niches of make-up, skin care and hair care. Ulta Beauty has announced an increase in customer traffic both online and in its stores until the end of July.
We will know on Thursday whether these promising trends have continued into the third quarter period, which runs until the end of October. Most investors following the action expect sales to rise 17% to $ 2.6 billion despite the increase in COVID-19 cases for most of the quarter.
2. Make more profit
Ulta’s updated growth targets imply modest sales growth through 2024 through the combination of approximately 4% annual comparable store sales gains, plus the addition of approximately 50 new stores each year. While investors may have been hoping for faster gains, the outlook for earnings is much better.
Ulta is targeting an operating margin of at least 13% this year, and management believes it can increase this metric to 14% over the next several years. Success here would allow earnings per share to rise at a double-digit compound annual growth rate (CAGR). But that depends on whether Ulta is successful in keeping inventory low without missing out on changing demand trends.
3. The new perspective
Ulta Beauty has raised its outlook for 2021 in each of the past two quarters, and Thursday’s report may include another hike in those forecasts. Currently, executives are targeting sales of between $ 8.1 billion and $ 8.3 billion, with an operating margin of around 13%. These measures would result in earnings per share of between $ 14.50 and $ 14.70.
The most important factor in monitoring Ulta’s potential rise from these near-term expectations is whether the chain’s strategic change is paying off. The company doesn’t build as many large format stores and invests heavily in digital sales services.
These measures should drive higher profits and lower financial risks, potentially at the expense of faster sales growth. But it could be a worthwhile compromise for investors looking for an efficient retail business that can increase profits through a wide range of sales terms. The year 2021 will likely set records on this score, but Ulta Beauty is positioning itself for more stable annual returns in 2022 and beyond.
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Demitri Kalogeropoulos has no position in the mentioned stocks. The Motley Fool owns shares and recommends Ulta Beauty. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
