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Ulta Beauty (ULTA +8%) is gapping nicely higher today following a glowing Q3 (Oct) performance. The beauty retailer exceeded top and bottom-line estimates, a quick reversal from downbeat headline numbers last quarter. Furthermore, the company has already started to see benefits from its actions to strengthen its market position after dismal Q2 (Jul) figures. Meanwhile, given encouraging sales trends over Black Friday and Cyber Monday, ULTA is cautiously optimistic about the holiday season, modestly lifting its previously lowered FY25 (Jan) guidance.

• Comparable sales growth ticked +0.6% higher, driven by a 0.5% uptick in transactions and a 0.1% increase in average ticket. Fragrance led the way, delivering high-single-digit comp growth, while skincare followed closely behind with mid-single-digit comp growth. Makeup and hair care comps fell by low single digits in the quarter, hindered by softness in mass makeup and limited newness. Meanwhile, EPS of $5.14 crushed analyst expectations, supported primarily by robust comp growth as merchandise margins were flat compared to last year.
• ULTA's headline performance reflected early benefits from several initiatives outlined last quarter designed to navigate four primary challenges: normalizing beauty sales, intensifying competition, an ERP transformation, and lackluster interest in promotional activity.
  • The normalization of the U.S. beauty category continued in Q3 as consumers remained focused on extracting the most from their lower purchasing power following years of cumulative inflation. However, management noticed improvements in its business due to enhancing its brand portfolio. For instance, during Q3, ULTA launched new makeup brands and expanded its wellness offerings. The company also expressed excitement over its brand launch pipeline, which is planned for Q4 (Jan).
  • Competition has not eased, particularly in the prestige market (more expensive cosmetics). However, ULTA expanded its loyalty program again in Q3, boasting a 5% bump yr/yr to 44.4 mln active members. Furthermore, ULTA's focus on its digital experience drove higher traffic and sales, generating double-digit growth in member engagement with the app, which accounted for roughly two-thirds of its e-commerce sales in Q3, a 600 bp jump yr/yr.
  • ULTA's new ERP system transformation is already behind it. While adjusting to a new system can create short-lived inefficiencies, the new system should help teams balance inventories and deliver better experiences for shoppers over the longer term.
  • As predicted, ULTA's promotional effectiveness improved from the first half of the year. Events during the quarter ultimately drove higher sales and traffic.
• The holiday season is off to a strong start. Several significant holiday sales weeks are still on the horizon, keeping ULTA on its toes. As such, the company only mildly hiked its FY25 outlook, projecting EPS of $23.20-23.75, up from $22.60-23.50, revs of $11.1-11.2 bln, up from $11.0-11.2 bln, and comps of negative 1% to flat, up from negative 2% to flat.

Bottom line, coming off a gloomy Q2 report where ULTA missed on nearly every metric, its swift return to delivering upbeat numbers in Q3 is fueling considerable confidence among investors today.