Dive Brief:

• Ulta shares took a tumble Thursday afternoon after the beauty retailer missed expectations for same-store sales in its fourth quarter. Those sales, which include e-commerce sales, rose 8.8% (down from a 17% rise in the year-ago period), just missing the FactSet forecast cited by MarketWatch for 9%. Retail same-store sales rose 4.2%, including salon sales growth of 3.2%. Salon sales rose 17.2% to $73.7 million, up from $62.9 million in the year-ago quarter. 

• E-commerce grew 60.4% and digital same-store sales rose 50.4% in the quarter, representing 12.8% of total company’s sales. E-commerce contributed 460 basis points of total company same-store sales, driven by transaction growth. 

• Q4 net sales rose 22.6% to $1.94 billion up from $1.58 billion in the year-ago period, in line with FactSet analyst expectations cited by MarketWatch. Excluding $108.8 million in sales in the 53rd week, net sales rose 15.7%.

Dive Insight:

For a retailer particularly keen on expanding its brick-and-mortar footprint, the prominence of e-commerce in the fourth quarter was something of a departure. Overall though, a slowdown in beauty sales and its own tough comparatives dragged on Ulta’s performance, but CEO Mary Dillon said that’s to be expected to some extent.

"[W]e are operating at a highly competitive marketplace coupled with the slowdown of growth rate of cosmetics that has persisted longer than expected," she told analysts, according to a conference call transcript from Seeking Alpha. "While we remain optimistic that our differentiated model will continue to gain share in a very fragmented market, these category and competitive dynamics are likely to pressure on margins in the near-term."

Labor, freight and healthcare costs are also taking a toll, with labor — due to rising wages in the market and Ulta’s own move to amplify merchandising and customer service — the most significant, she said.

"So taking all these factors into consideration, it’s clear that for the long-term health of the business, it no longer makes sense to drive toward the 15% operating margin target on the timetable we set several years ago," she said. The company is moving to cut costs while avoiding under investing in areas of long-term growth. 

The company in the period saw "only a slight increase in overall promotions" and that was largely driven by the increased percentage of e-commerce sales, which Dillon said tend to be more promotional. The beauty retailer said it has expanded its loyalty program, now at almost 28 million members, with room to grow. The retailer opened 16 stores in the fourth quarter, ending the year with 1074 stores, and on track to open another 100 this year. 

Dillon on Thursday also addressed recently filed lawsuits amid accusations that several Ulta stores repackaged and reshelved returned cosmetics to sell them at full price. "Let me be clear, we do not sell used, damaged or expired products."

Ulta is re-communicating and reinforcing that policy with store staff nationwide and reiterating its policy on returns. The allegations haven’t hurt the brand, store traffic or sales "in any discernible way," she said.