After-hours big drop! Middle East warfare spreads to beauty retail: Inflation fears squeeze consumer budgets, Ulta Beauty's performance this year is below expectations.

Cosmetics retailer Ulta Beauty (ULTA.US) continues to maintain strong same-store sales growth, with net sales exceeding expectations for CKH Holdings, but fourth-quarter profits fell short of expectations and 2026 fiscal year performance guidance disappointed investors, resulting in an 8.08% drop in the stock price after the market close. So far this year, the stock has risen approximately 3.3%, outperforming the S&P 500 index. In the fourth quarter, revenue performance continued to be strong due to the success of its Beauty Unleashed strategy, growth in same-store sales, and the acquisition of Space NK. Fourth-quarter net sales increased by 11.8%, reaching $3.9 billion, higher than the general expectation, while same-store sales grew by 5.8%, higher than the 1.5% in the fourth quarter of 2024, and also higher than the expected 4.25% growth. However, earnings per share were $8.01, lower than the $8.46 in the same period last year, and 2 cents below Wall Street's expectations. The company's annual performance guidance is lower than Wall Street expectations. According to the company statement, same-store sales (measuring revenue from online and physical stores operating for at least one year) are expected to increase by 2.5% to 3.5% this year, with the midpoint lower than analysts' average expectation of 3.5%. The midpoint of earnings per share is slightly below the average expectation, projected to be between $28.05 and $28.55, with a midpoint of $28.30, also lower than the market's general expectation of $28.58. The company stated that despite a slight decrease in gross margin as a percentage of net sales due to reduced fixed expenses and income, decreased inventory losses and improved supply chain efficiency offset this impact. Gross margin as a percentage of sales decreased by 10 basis points to 38.1%, while operating profit margin dropped from 14.8% a year ago to 12.2%. Although under the leadership of CEO Kecia Steelman, this cosmetics chain has achieved strong revenue growth and expanded to regions such as the Middle East, the outlook indicates that Ulta is taking a cautious approach amid heightened political unrest at GEO Group Inc and ongoing cost pressures. In the US, demand for cosmetics remains strong. Ulta's rich product line, from mass market to high-end products, has also attracted many consumers. To attract younger and wealthier consumers, Ulta relies on high-end brands owned by celebrities, such as Beyonc's Cecred hair care series and Rihanna's Fenty Skin Body, and also carries out holiday promotional activities featuring Kourtney Kardashian and Paris Hilton. But the market is full of uncertainty, with escalating tensions in the Middle East causing energy prices to soar and disrupting global shipping, leading to concerns about consumer economic pressures, especially as US consumers are currently facing inflation problems. In particular, lower-income consumers have been reducing discretionary spending and allocating more of their tight budgets to everyday essentials such as groceries. Last month, Estee Lauder Companies Inc. Class A (EL.US) predicted that due to weak demand in the Americas market and reforms under new CEO leadership focusing on increased investment and marketing efforts for high-end products, its annual profits will be lower than expected. Ulta also faces fierce competition from Target Corporation (TGT.US) and Walmart Inc. (WMT.US) - these large retailers are expanding their beauty product lines and benefiting from the surge in demand for Korean cosmetics. Zacks Investment Research stock strategist Ethan Feller said, "Ulta Beauty's position as a leading professional beauty retailer is undisputed, but Sephora, Amazon.com, Inc., and an increasing number of consumer-facing brands are all competing for the same consumer wallet. Even in a leadership position, when valuation is relatively high compared to growth prospects, multiple stock price declines cannot be avoided."