Ulta Beauty's performance is a mixed bag: Q2 profits exceeded expectations, prompting an increase in annual guidance, but warning signals indicate a slowdown in sales growth.

date
29/08/2025
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GMT Eight
Ulta warns that consumer spending may slow down and its sales may decline, but guidance still exceeds expectations.
Ulta Beauty, a cosmetic retailer (ULTA.US), exceeded expectations in the second quarter and raised its full-year performance forecast, despite warning that consumers may reduce spending. Net profit for Q2 increased from $2.526 billion (or $5.30 per share) in the same period last year to $2.609 billion (or $5.78 per share). Revenue grew by 7.7% year-on-year to $2.8 billion, surpassing analysts' expectations. Ulta's Interim Chief Financial Officer, Chris Lialios, stated during the earnings call that comparable store sales in the second half of the year are expected to remain flat or increase slightly (in the low single-digit percentage range). Ulta now anticipates a growth of 2.5% to 3.5% in comparable store sales for the year, up from the previous forecast of no more than 1.5%. While this represents a lower growth rate than the 6.7% in the second quarter, it still exceeds Wall Street's expectations, marking a strong performance in the first half of the year and leading to an upward revision of the full-year forecast. Furthermore, the company anticipates sales for the fiscal year 2025 to be between $12 billion and $12.1 billion, higher than the previous top estimate of $11.7 billion. Earnings per share are expected to be between $23.85 and $24.30, above the previous estimate of $22.65 to $23.20. Ulta previously raised its annual profit forecast and the upper limit of its full-year sales range in May. Lialios remarked, "Given the continued uncertainty in consumer spending, we believe a cautious approach is wise." After the performance announcement, Ulta's stock price initially rose by 9.1% in after-hours trading, but as of the time of writing, the increase has narrowed to 3.1%. The company's stock price has already risen by 22% this year, surpassing the S&P 500 index's 11% increase. These results indicate that while consumers continue to spend, retailers are managing their expectations. Despite concerns from budget-conscious American consumers about rising prices due to tariffs imposed by President Trump, Ulta has seen significant growth in demand for cosmetics this year. Consumer spending has decreased or been reduced in other non-essential consumption areas, making beauty products one of the categories that consumers are still willing to purchase. However, this also intensifies the competition for Ulta, as professional brands like LVMH-owned Sephora, retail giants like Walmart Inc., and department stores like Kohl's have all expanded their beauty businesses. For investors, tariff issues are also a significant challenge for retailers. However, Ulta is less directly impacted compared to other retailers as only about 1% of its products were directly imported in the previous fiscal year. The risks the company faces due to higher tariffs are mostly minimal, such as with store facilities and supplies. Even during economic turbulence, Ulta CEO Kecia Steelman emphasized that beauty and health products tend to perform well as they provide unique comfort and solace. She stated during the earnings call, "Our research shows that consumers continue to be cautious in their daily spending and closely monitor price trends to address tariff impacts. At the same time, beauty enthusiasts tell us they are prioritizing their beauty care routines and maintaining a strong interest in this category." Compared to the same period last year, customers are shopping more frequently and spending more per visit at Ulta's website and stores. Transaction volume grew by 3.7%, and average spending per visit increased by 2.9%. Bloomberg analyst Lindsay Dutch commented, "Ulta's upward revision of revenue expectations for 2025 appears conservative, possibly due to economic uncertainties, leaving room for more unexpected scenarios." Earlier this month, Ulta and Target Corporation announced that their partnership, which included operating over 600 beauty stores within Target stores and selling products on Target's website, will end after next year with no renewal. Steelman mentioned that the merger with Target had minimal impact on Ulta's financials, with royalties from the partnership accounting for less than 1% of net sales. Ulta is still exploring other avenues for growth. The company has introduced several new brands and products this quarter, including more products from Sol de Janeiro, the Korean-exclusive beauty brand Peach & Lily, and singer Shakira's hair care brand, Isima. Additionally, Ulta is launching a third-party transaction platform which is set to go live in the third quarter. This move follows other retailers, like Best Buy Co., Inc., as they seek to expand product offerings without taking up additional shelf space or increasing their own inventory. In June, Ulta announced the departure of former CFO Paula Oyibo after about a year in the position, with Lialios stepping in as interim CFO. The company is currently searching for a permanent successor. In efforts to attract more customers, Ulta is also looking to expand internationally. In July, the company acquired the UK beauty retailer Space NK from Manzanita Capital. This acquisition allows Ulta to enter a new international market with 83 stores in the UK and Ireland. Ulta did not disclose the total cost of the acquisition but stated that it was funded through cash on hand and existing credit facilities without significant impact on the current fiscal year's financial performance. Steelman mentioned that Space NK provides a cost-effective way for Ulta to enter new markets, as the business will continue to operate independently with potential strategic implications for the company. Compared to Ulta, Space NK's stores are smaller and typically located on major city streets, focusing on high-end beauty products. Ulta has also opened its first store in Mexico recently and plans to open its first store in the Middle East later this year. Ulta is continuously looking for new growth opportunities, with plans to expand into health-related products in about 370 stores by the end of this quarter. Steelman mentioned that the company will also be launching a new third-party transaction platform in the third quarter. Despite facing challenges in the retail landscape, Ulta remains optimistic about its future growth potential both domestically and internationally.