Dive Brief:
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Ulta on Thursday reported mixed results from Q2, with record e-commerce sales (up by more than 200%), but net income falling by 95%, to just $8 million. Store closure and impairment costs alone reduced net income by $33.5 million, according to a company press release.
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Comp sales declined 26.7% in the quarter, but executives said on a conference call with analysts that comps had improved over the course of the quarter. Comps were down 37% in May but had improved to be down just 10% in July. In the first few weeks of August, they've been down mid-single digits, and CEO Mary Dillon said it would "take some time" to return to pre-COVID levels.
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In order to support a holiday season with higher expected levels of e-commerce, the beauty retailer is accelerating the opening of its Jacksonville fulfillment center, as well as increasing capacity in its existing distribution centers and expanding ship-from-store to an additional 100 stores.
Dive Insight:
Ulta's second quarter was focused heavily on e-commerce, and what shifts the beauty retailer could make on the back-end to better support more online purchasing behavior.
Among its efforts, the retailer expanded curbside to nearly all of its stores, and is working on introducing a notification system to improve that experience in time for the holidays. Combined with BOPIS, the two pickup offerings totaled 20% of digital orders in the quarter.
The retailer is also working on how to adjust the in-store shopping experience without the high-touch offerings it's used to. In pursuit of that, Ulta has expanded virtual try-on capabilities to hair color, false lashes and the Benefit brow bar, according to a Seeking Alpha transcript of the conference call.
"While these are newer capabilities our guests are actively playing and engaging with these innovative tools," Dillon said on the call.
Ulta's Q2 performance
| Metric | Q2 | YoY |
|---|---|---|
| Net sales | $1.2 billion | -26% |
| Operating income | $12.8 million | -94% |
| Gross profit | $329 million | -46% |
Source: Ulta press release
The retailer also introduced a services booking feature in the app to allow shoppers to schedule in-store services and change their appointments at over 1,000 of its stores. Currently, only salon and brow services have restarted, at 88% and 85% of its stores, respectively. Makeup and skin services are still off the table for now, but the retailer is talking with medical experts about how to safely reopen them.
Even with a strong e-commerce performance, stores are still key to Ulta's success — and to its long-term growth plans. CFO Scott Settersten said the retailer planned to open 30 new stores in 2020, and "at least as many" in 2021. While that's down significantly from prior years, due to the pandemic, Settersten said the company remains "confident in the longer term opportunity to expand our fleet."
But the reality of the pandemic means that stores will have to remain on the back burner for the time being, and executives said they likely won't bring back all of the company's furloughed associates this year as a result. So far, all of the retailer's stores have reopened and 17,000 of the 33,000 furloughed associates have returned to work. Given the shift to digital, e-commerce may also become a bigger part of the retailer's sales going forward.
"We think ULTA is making aggressive moves to fight the natural margin headwinds as digital mixes higher," Credit Suisse analysts led by Michael Binetti said in emailed comments, "but the biggest risk to the company heading into 2021 will be creating buy-in that it can still achieve its longer term target to maintain double digit margins if we're right that ecommerce is going to be a significantly larger part of its business in the long term."
