Ulta Beauty (ULTA -2.73%) has a few big questions to answer for investors this week. On Thursday, Dec. 2, the beauty products and spa services giant will announce results for its fiscal third quarter while issuing a big-picture outlook for the key holiday shopping period ahead.
Wall Street is optimistic about the chain's prospects for closing out 2021 on a strong note despite challenges related to rising costs and supply chain bottlenecks. But it's less clear how Ulta will succeed in an increasingly digital selling landscape given its traditional strength at helping customers experiment with beauty products before purchasing them.
With that bigger picture in mind, let's look at three metrics worth watching in Ulta Beauty's upcoming earnings report.
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1. Accelerating rebound
Three months ago, Ulta surprised investors by revealing accelerating demand growth in the beauty industry. Sales jumped to $2 billion from $1.2 billion a year ago and $1.7 billion in the same period in 2019. That success was powered by generally strong selling conditions but also by a faster rebound in the makeup, skincare, and hair care niches. Ulta Beauty announced soaring customer traffic both online and in its stores through late July.
We'll learn on Thursday whether those hopeful trends carried on into the Q3 period, which runs through late October. Most investors who follow the stock are looking for sales to rise by 17% to $2.6 billion despite rising COVID-19 case levels through most of the quarter.
2. Making more profits
Ulta's updated growth targets imply modest sales growth through 2024 thanks to the combination of roughly 4% annual gains in same-store sales, plus the addition of roughly 50 new stores each year. While investors might have been hoping for faster gains, the earnings outlook is significantly brighter.
Ulta is targeting an operating margin of at least 13% this year, and management believes they can boost that metric to as high as 14% over the next few years. Success here would allow earnings per share to rise at a double-digit compound annual growth rate (CAGR). But it depends on Ulta successfully keeping inventory low without missing out on changing demand trends.
3. The new outlook
Ulta Beauty raised its 2021 outlook in each of the last two quarters, and Thursday's report might include another hike to that forecast. Currently, executives are targeting sales between $8.1 billion and $8.3 billion, with an operating margin of around 13%. These metrics would translate into earnings per share of between $14.50 and $14.70.
The bigger factor to watch over Ulta's potential hike to those short-term forecasts is whether the chain's strategic shift is paying off. The company isn't building as many large-format stores and is investing heavily on digital selling services.
These moves should support higher profits and reduced financial risk, potentially at the expense of faster sales growth. But that might be an attractive trade-off for investors looking for an efficient retailing business that can expand earnings through a wide range of selling conditions. The 2021 year will likely set records on this score, but Ulta Beauty is positioning itself for steadier annual returns in 2022 and beyond.
