Dive Brief:

• On Thursday, Ulta Beauty announced net sales of $1.68 billion for the third quarter, a 7.9% increase over the year-ago quarter. Comparable sales increased 3.2%, driven by transaction and average ticket growth. That's compared to an increase of 7.8% the year prior, according to a company press release.

• Operating income was $167.8 million, or 10% of net sales, compared to $169.2 million (10.8% of net sales) the year before. Net income was $129.7 million, down slightly from $131.2 million in Q3 2018.

• The beauty retailer opened 31 stores in the quarter (28 net), ending with 1,241 total stores. Gross profit as a percentage of net sales increased 40 basis points to 37.1%, thanks to improved merchandise margins, among other things.

Dive Insight:

Despite Ulta's continued strength, the weak cosmetics market, which caused the retailer to lower its guidance in Q2, was top-of-mind for executives and analysts alike.

CEO Mary Dillon said on a conference call with analysts that the U.S. makeup category was in a "down cycle," as it has been since 2017, and that "this negative trend has continued through 2019 with further deceleration in the most recent quarter." She noted that consumers were still buying and wearing makeup, according to a Seeking Alpha transcript, even for more natural looks, which "actually requires multiple products."

"We know it will take time to bring newness and innovation to the category, but we're confident that the makeup category will emerge from this down cycle and return to growth. Longer-term growth drivers, such as demographic trends, remain favorable," Dillon said, highlighting engaged Latina shoppers as one of the fastest-growing demographics, as well as Gen Z shoppers, who "are expected to increase their usage of makeup as they age."

Cosmetics made up 51% of sales in the quarter, down about 200 basis points from last year, according to executives. While makeup has been down, Ulta saw comp sales growth across skincare, fragrance, accessories and haircare. Skincare, bath and fragrance increased to 21% of total sales in the quarter and mass cosmetics comps grew by mid-single digits thanks to exclusive brands like Morphe, ColourPop and Florence by Mills.

"We would expect that the makeup category headwinds are with us for a while," Dillon said. "That said, we are in a great position because we operate, and I think everybody knows this, but across so many categories of beauty — and we have the ability to flex, and we are flexing."

So far, skincare is a large part of that, which has grown in popularity with younger consumers. As a result, the retailer expanded its skin bar, which offers quick services like facials and mineral infusions, to 100 more stores. The offering is now available at about 20% of Ulta's footprint.

The number of Ulta loyalty members also increased in the quarter, by 11%, reaching 33.9 million. They continue to make up more than 95% of the retailer's total revenues, executives said. 

Despite signs of strength — Dillon noted that Ulta is gaining share "across all major beauty categories" — the holiday season has not been easy, even for such a popular category.

"We expected it to be more promotional in the beauty space, and I think we communicated that to a lot of folks we've talked to over the last few months," Chief Financial Officer Scott Settersten said on a call with analysts, highlighting the shorter shopping season. "We've got deeper discounts across the board. And just remind everyone that in the holiday season, unlike in the rest of the three quarters of the year, we compete with everyone in retail for wallet share ... this is a critical time for us."