Ulta, usually a top performer, unexpectedly lowered its guidance for fiscal 2019 on Thursday, citing "headwinds" in the U.S. cosmetics market, according to a company press release. CEO Mary Dillon said on a conference call with analysts that the cosmetics category, which makes up about 50% of the retailer's business, failed to live up to the company's expectations for the period, according to a Seeking Alpha transcript.
Nevertheless, net sales at the retailer rose 12% in the second quarter to $1.67 billion, compared to $1.49 billion in the year-ago period. Comparable sales also increased 6.2%, thanks to growth in the number and size of transactions, but down slightly from a 6.5% increase a year ago.
Net income was $161 million, an increase of 8.7% from $148 million a year ago, and operating income also increased, to $208 million or 12.5% of net sales. That's up 7.3% from last year. Gross profit as a percentage of net sales increased 40 basis points to 36.4%, up from 36% the year prior.
As a favorite in the usually well-performing beauty market, Ulta delivered a surprise by lowering its guidance for fiscal 2019 based on weakness in the cosmetics category. Dillon said that while cosmetics is usually one of the retailer's highest margin categories, it "only delivered in the low single-digit growth year-to-date, well outperforming the market but below our expectations."
Dillon noted that cosmetics is struggling in the U.S. market in general, commenting that, "after several years of very strong performance, growth in the makeup category has been decelerating over the last two years, but recently turned negative."
Despite the dampening on its guidance (total sales are expected to increase 9% to 12% rather than in low double digits and comps are now estimated to be between 4% and 6% rather than 6% to 7%), the retailer still put up a strong quarter. Ulta opened 20 stores in the quarter and executives said it now holds 24.5% of the prestige beauty market, up 210 basis points from last year.
Part of Ulta's success in gaining market share comes from consumers abandoning department stores and drugstores, GlobalData Retail Managing Director Neil Saunders said in emailed comments.
"Ulta is accelerating this trend by opening around 80 new shops over this fiscal year — some of which are squarely on the turf of rivals," he said. "In our view, physical expansion remains smart as Ulta has clearly demonstrated that because of their product authority and range of services, its stores have the power to generate strong customer traffic and help boost online sales in the trade area."
As in quarters past, Ulta executives highlighted the retailer's strategy of acquiring exclusives, as well as partnering with digitally native brands, noting two big launches: KKW Beauty by Kim Kardashian West, which will launch this quarter, and Florence by Mills, a Millie Bobby Brown line that just debuted. Earlier this month, the retailer also debuted Sparked by Ulta, a platform focused on highlighting digitally native brands, which will enter select stores on Sept. 22.
Loyalty was also a highlight for the retailer — with members accounting for over 95% of sales. Executives noted that they are creating more personalized recommendations and replenishment reminders for customers, and have begun using AI to improve marketing efforts. In addition to improvements in targeted promotions, Saunders also highlighted a shift to more emotionally-driven marketing, which has "activated some consumers who previously saw Ulta as a more basic or functional beauty player."