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Ulta Beauty Q3 Earnings: What to Watch

Investor optimism is rising heading into the third-quarter earnings report from Ulta Beauty (NASDAQ: ULTA) that will be filed in just a few days. The beauty retailer's stock was hammered during the initial COVID-19 shutdowns but has recovered most of the lost ground following an encouraging operating update in late August and positive news on the vaccine front.

That improving sentiment will be put to the test when CEO Mary Dillon and her team make public their Q3 results on Thursday, Dec. 3, while offering their best guess at how the holiday season might look for the business.

Let's look at a few trends investors might want to watch for in that announcement.

Image source: Getty Images.

Did Ulta's rebound progress?

Ulta has a thriving online business, but the pandemic has still harmed demand in two major ways. Outbreaks have pushed customer traffic down at stores and limited the chain's ability to use its key competitive advantage on interactive beauty product sampling. COVID-19 has also dampened the need for many makeup products as people stay closer to home.

That situation convinced executives in late August to project sluggish sales through at least the end of 2020. But investors should still see improvement this week. Comparable-store sales declines were 27% in Q2 but had lessened to just 10% in the final month of the quarter. We'll find out on Thursday whether Ulta was able to get back to growth by late October.

How are Ulta's inventory levels doing?

The wild swings in makeup demand left Ulta holding some undesirable inventory, but the company has avoided major write-down charges so far in 2020. In fact, Ulta even stepped back on its sales promotions in the first half of the year compared to the year-ago period.

Inventory dropped in Q2, too, but not by as much as sales fell. That means investors will be watching for signs that the company has a strong inventory position heading into the holiday shopping season. Following metrics like gross profit margin, which dove over the last six months, will help answer that question.

ULTA Gross Profit Margin data by YCharts

Ideally, Ulta can make progress in boosting bottom-line profitability back toward the mid-single-digit range after it landed at just 1% in Q2.

What is Ulta looking to do in 2021?

Ulta's new partnership with Target is exciting for shareholders since it gives the company an attractive platform for adding hundreds of highly efficient locations to its base. Look for Dillon to spend some time detailing that potential on Thursday even as she predicts a sluggish end to the year for the makeup industry.

Ulta initially is aiming to get into about 100 Target locations next year, which will be about the highest annual store growth that the company has achieved in recent years. Sure, these "store-within-a-store" shops won't have nearly the sales potential as a full retailing store. They might not include any salon services, either. But they illustrate that Ulta is finding new ways to expand its influence at a time when consumers are avoiding extra shopping trips.

Barring a big inventory or demand surprise on Thursday, Ulta seems set to finish a difficult year on a high note. That win should boost investors' confidence that a solid rebound is possible in 2021.

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Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ulta Beauty. The Motley Fool has a disclosure policy.


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