Ulta Beauty, Inc. (ULTA) Q3 2025 Earnings Call Transcript

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Overview

The earnings call summary presents a mixed sentiment. Financial performance is strong, with increased guidance and revenue growth, but operating profit is expected to decrease. Product development and market strategy are positive, with confidence in the innovation pipeline and market share gains. However, SG&A growth impacts margins negatively. The Q&A section reveals optimism but lacks clarity on some financial details. Overall, the combination of positive growth indicators and cost concerns suggests a neutral stock price reaction.

Key Financial Performance

Net Sales Net sales increased 12.9% to $2.9 billion year-over-year. This growth was attributed to the expanding relevance of the Ulta Beauty brand, favorable investments supporting long-term strategy, and strong team commitment.

Operating Profit Operating profit was 10.8% of sales, compared to 12.6% last year. The decline was due to higher SG&A expenses, including incentive compensation and investments in technology and strategy.

Diluted EPS Diluted EPS was $5.14 per share, flat compared to last year. This was influenced by higher SG&A expenses and offset by strong sales growth.

Comparable Sales Comparable sales increased 6.3%, driven by a 3.8% increase in average ticket and a 2.4% increase in transactions. Growth was consistent across all periods, with both store and digital channels contributing.

E-commerce Sales E-commerce sales increased in the mid-teen range year-over-year, driven by enhanced digital engagement and personalization efforts.

Gross Margin Gross margin increased 70 basis points to 40.4% of sales, compared to 39.7% last year. This was due to lower inventory shrink, higher merchandise margin, and more effective promotion strategies.

SG&A Expenses SG&A expenses increased 23.3% to $841 million, primarily due to higher incentive compensation, Space NK acquisition, and investments in the Ulta Beauty Unleash Strategy.

Inventory Inventory increased 16% to $2.7 billion, reflecting new brand launches, Space NK acquisition, and the addition of 63 net new Ulta Beauty stores.

Capital Expenditures Capital expenditures were $87 million, driven by investments in new and existing stores and IT systems.

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Operating Highlights

Fragrance: Sustained double-digit comp sales growth driven by luxury brands like Valentino and Dolce & Gabbana, and new launches from Miu Miu and Squishmallows.

Skincare: High single-digit comp growth led by Prestige skincare brands like Tatcha and Dermalogica, and new launches like Fenty Skin Body exclusive to Ulta Beauty.

Makeup: Mid-single-digit comp growth supported by newness from brands like NYX, Morphe, and L'Oreal, and successful events like 21 Days of Beauty.

Haircare: Mid-single-digit comp growth driven by Prestige hair brands like Moroccanoil and Nutrafol, and exclusive brand Cécred.

Services: Mid-single-digit comp growth driven by cut and color services, expanded brow services, and stylist productivity.

International Expansion: Opened 7 stores in Mexico and 1 in the Middle East (Kuwait), with strong guest response and curated assortments.

UB Marketplace: Launched with over 120 brands and 3,500 SKUs, expanding online assortment with minimal inventory risk.

Digital Engagement: App engagement accounted for 65% of online member sales, with new features like Replenish & Save and Wishlist.

Supply Chain Upgrades: Completed retrofit of Dallas distribution center with advanced automation and robotics, enhancing inventory flow and capacity.

Ulta Beauty Unleashed Strategy: Focused on strengthening U.S. business, scaling new businesses, and optimizing cost structure for long-term growth.

Leadership Changes: Appointed Chris DelOrefice as CFO, emphasizing leadership alignment for future growth.

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Risk or Challenges

Consumer Confidence: Softening in overall consumer confidence in Q3 could impact consumer spending, particularly during the holiday season. Beauty consumers' budgets are tight, and they are focused on value, which may affect sales.

SG&A Expenses: Higher SG&A expenses, including increased incentive compensation, store payroll, and benefit expenses, are pressuring operating margins. This could impact profitability if not managed effectively.

Shrinkage: Although shrinkage has improved, it remains a risk factor that could adversely affect inventory and profitability if not continuously addressed.

Tariff-Related Price Increases: Sales declines in personal styling tools are attributed to pressures from tariff-related price increases, which could continue to impact this category.

Macroeconomic Environment: The challenging macroeconomic backdrop, including inflationary pressures and tight consumer budgets, poses risks to overall sales and profitability.

International Expansion: While international expansion efforts in Mexico and the Middle East show promise, they carry risks such as market acceptance, operational challenges, and potential financial strain.

Technology Investments: Higher operating expenses due to investments in cloud-based technology and IT systems could pressure short-term profitability, even though they aim to support long-term growth.

Category Mix: Unfavorable category mix, such as the decline in personal styling tools, could impact overall sales and profitability.

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Guidance & Outlook

Revenue Growth: Net sales for fiscal 2025 are expected to be approximately $12.3 billion, with comparable sales growth between 4.4% and 4.7%.

Operating Margin: Operating margin for fiscal 2025 is projected to be between 12.3% and 12.4% of net sales, with SG&A being the primary driver of deleverage.

Earnings Per Share (EPS): Diluted EPS for fiscal 2025 is expected to range between $25.20 and $25.50.

Fourth Quarter Projections: For Q4, comparable sales growth is expected to be between 2.5% and 3.5%, with operating margin between 12% and 12.3%. EPS for the quarter is projected to be between $7.61 and $7.90.

Holiday Season Outlook: The company anticipates strong holiday performance, with a focus on value-driven consumer behavior, early gift set drops, and strategic promotions to drive sales.

International Expansion: Ulta Beauty is expanding internationally, with new stores opened in Mexico and the Middle East, and plans to grow its presence in these markets over time.

Marketplace Initiative: The UB Marketplace was launched in Q3, adding over 120 brands and 3,500 SKUs to the online assortment, aimed at strengthening category authority and capturing incremental growth opportunities.

Digital Engagement: Investments in digital platforms, including new features like Replenish & Save and Wishlist, are expected to enhance guest shopping experiences and drive app engagement.

Wellness Category Growth: Ulta Beauty is expanding its wellness category with new brands and elevated fixtures in stores, aiming to capitalize on the growing wellness market.

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Shareholder Return Plan

share buyback program: In the quarter, we repurchased 427,000 shares, bringing the year-to-date total for our share buyback program to 1.7 million shares or $693 million. At the end of the quarter, we had $2 billion remaining under our current $3 billion repurchase authorization.

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Key Q&A

Q:Can you talk about what you're hearing from brands about pricing? The 3.8% ticket comp was very impressive. Do you think this might build in the coming quarters?

A:Management noted that pricing increases are common and not extraordinary in the business. They observed market-wide price increases from brands like e.l.f., Coty, and Helen of Troy. These increases provide a short-term benefit to cost of goods but eventually balance out as older inventory is sold and replaced with newer, higher-priced products.

Q:Can you give more color around app engagement and online sales penetration? Are consumers migrating to purchasing across channels?

A:Management highlighted strong app engagement, which grew to 65% from 63% last quarter. They noted that 80% of their business still comes from stores, but e-commerce has shown three consecutive quarters of double-digit growth. New capabilities like Split Card, Replenish & Save, Wishlist, and Venmo have enhanced the digital experience. Investments in personalization and technology are driving growth across both channels.

Q:How much of the comp performance on a 2-year stack basis is due to product newness, better execution in-store, or better promotions?

A:Management attributed the performance to a combination of factors, including strong merchandising (especially in gifting and fragrance), digital capabilities, marketing campaigns, and operational excellence. They emphasized that the company is executing well across all areas, supported by a clear plan and strong teamwork.

Q:How much of the SG&A growth was due to the incremental brand campaign during the quarter? Should we expect SG&A to be managed closer to sales in 2026?

A:Management explained that SG&A growth was primarily due to higher incentive compensation, store payroll, and cloud-based software amortization. Advertising costs were leveraged due to higher revenue. They plan to share more details about 2026 SG&A in March but emphasized that 2025 is an investment year and 2026 will not be another heavy investment year.

Q:How do you feel about the innovation pipeline and exclusive brands for next year?

A:Management expressed confidence in the 2026 innovation pipeline, noting that it is balanced across the portfolio. They emphasized the importance of newness and innovation in driving the business and stated that the team has prioritized these areas.

Q:What is your philosophy around the long-term EBIT margin of 12%? Should we still anchor to this as we think about 2026?

A:Management stated that while they are outperforming the original plan, it is premature to change long-term growth targets. They do not expect EBIT margins to deteriorate from 2025 levels and are focused on building a plan that supports market share growth and profitability.

Q:Are you finding that some of the momentum is starting to fade where consumers are shopping more around events?

A:Management reported consistent comp growth across all periods and strong performance during Black Friday and Cyber Monday. They remain confident in their plans and do not see momentum fading.

Q:Can you quantify the shrink benefits seen this year? Are there more tailwinds to this?

A:Management noted modest improvements in shrink during Q3 and expect similar improvements in Q4. They anticipate full-year 2025 shrink to be lower than 2024 and believe there is still some opportunity for further reduction.

Q:How do you see the competitive situation today versus earlier in the year?

A:Management acknowledged the competitive nature of the beauty category but emphasized their differentiation through loyalty programs, a wide product range, and experiential shopping. They believe they are uniquely positioned to win and take market share.

Q:What are you seeing in prestige and mass categories? Is there a difference?

A:Management reported mid-single-digit growth in both prestige and mass categories, with share gains in areas like skin, fragrance, and mass makeup. They are confident in their plans to drive sustained market share improvements.

Q:What is the status of the Space NK initiative?

A:Management described Space NK as being in the early stages but highlighted its agility and clienteling capabilities. They aim to protect what makes Space NK unique while leveraging Ulta's operational efficiencies to create mutual benefits.

Q:Can you explain the SG&A growth and its impact on margins?

A:Management attributed SG&A growth to factors like higher incentive compensation, store payroll, and cloud-based software amortization. They expect gross margin to remain flat for the year, with some leverage in supply chain costs in Q4.

Q:What is your perspective on the Target store count and its pace?

A:Management reaffirmed their long-term target of 1,800 stores and expressed confidence in this plan.

Q:What are your expectations for pricing and tariff impacts going forward?

A:Management expects modest price increases in Q4 and noted that tariff impacts take one to two quarters to fully reflect in inventory costs.

Q:What is your view on newness and internal improvements driving growth?

A:Management is optimistic about the 2026 newness pipeline and emphasized the benefits of recent investments in technology and guest-facing initiatives. They believe there is significant opportunity for continued growth as these investments mature.

Q:What are your expectations for the holiday season and long-term growth?

A:Management is pleased with early holiday performance and remains focused on execution. They are confident in their long-term plans to sustain momentum and grow market share.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the SG&A breakdown for the quarter and the exact impact of the incremental brand campaign. They also did not provide a clear answer on the long-term EBIT margin target adjustments, stating it was premature to change targets despite outperforming the original plan.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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