Pandemic hurts Ulta Beauty in Q3
Softer traffic to physical stores was a major headwind for Ulta Beauty in the third quarter, even despite strong demand for skin and body care products.
Same-store sales for the quarter ended Oct. 31 dropped 8.9%, the company said. While the losses were better than the 26.7% decline in Q2, the third quarter results show the pandemic's effects on specialty retailers such as Ulta are far from over. In fact, Ulta said it expects comps for its holiday quarter to fall 12% to 14%, which is similar to declines early in the pandemic.
“Today, we reported financial results that exceeded our expectations as we continue to navigate a year of uncertainties with agility and strength,” said Mary Dillon, chief executive officer. “I am proud of how well our teams are responding and leading throughout this difficult period, and I want to thank all of our Ulta Beauty associates for their continued commitment to serving our guests and taking care of each other during this unprecedented time.”
Dillon said during the earnings call that while cosmetics sales are still way down, most beauty enthusiasts are maintaining or expanding their skin-care routines as a form of self-care during the COVID-19 crisis. Still, that hasn't been enough, nor has a 90% increase in e-commerce sales, to aggressively lift the retailer.
For Q3, net sales decreased 7.8% at Ulta to $1.6 billion compared to $1.7 billion in the third quarter of fiscal 2019. Transactions declined 15.4%, but average ticket increased 7.6%.
Gross profit decreased 12.5% to $545.5 million compared to $623.4 million in the third quarter of fiscal 2019. As a percentage of net sales, gross profit decreased to 35.1% compared to 37.1% in the third quarter of fiscal 2019, primarily due to deleverage of fixed costs due to lower sales and channel mix shifts. These pressures were partially offset by higher merchandise margins primarily due to lower promotional activity. Operating income decreased to $101.3 million, or 6.5% of net sales, compared to $167.8 million, or 10.0% of net sales, in the third quarter of fiscal 2019. Adjusted operating income was $124.9 million, or 8% of net sales.
Ulta’s profitability has eroded as sales slow and shift to e-commerce and away from in-store, driving costs up. The company expects to pay as much as $190 million on protective equipment and other safety measures at its more than 1,000 stores.
"In this new normal, beauty has become more than makeup, more than product," Dillon said. "Today, beauty is a critical link to acts of self-care and wellness. And as a well-loved brand with a diverse assortment and a wide range of price points, outstanding service offerings and knowledgeable and passionate associates, Ulta Beauty is well positioned to lead and shape how guests experience beauty in this new normal."
The company began the fourth quarter with nearly all stores open for retail. However, as COVID-19 prevalence increases, market-specific government restrictions may also increase, resulting in reduced operating hours, limitations on in-store capacity, and in some cases, mandated store closures.
During the third quarter, the company opened 17 stores. The company ended the third quarter of fiscal 2020 with 1,262 stores and square footage of 13,263,615. In addition, the company closed 19 stores during the third quarter of fiscal 2020.
“Ulta Beauty is well positioned for this gift giving season as consumers continue to seek moments of joy, connection and self-care, and we are encouraged with early holiday sales trends in November. However, the operating environment continues to be dynamic. While it is difficult to predict future impacts of the pandemic on demand this holiday season, we have increased our sales expectations for the fourth quarter and now anticipate comparable store sales will decline in the range of 12% to 14%,” Dillon said. "We know this holiday season will be like no other, but our team is ready and excited to help our guests see the joy of the season.”