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What to Expect from Ulta Beauty’s Fiscal 2Q17 Margins

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Q2 margin expectations

Ulta Beauty (ULTA) is scheduled to announce its fiscal 2Q17[1. Fiscal 2Q17 ended on July 29, 2017] results on August 24. The company’s gross margin contracted in fiscal 1Q17, which ended on April 29, 2017. However, the company’s operating margin was up 60 basis points in fiscal 1Q17.

Ulta Beauty expects a slight improvement in its gross margin in fiscal 2Q17. The company expects its operating margin to remain flat on a year-over-year basis for the quarter.

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Margins in 1Q17

Ulta Beauty’s gross margin was down 20 basis points to 36.2% in fiscal 1Q17. This decline was due to supply chain investments associated with the new distribution centers and core merchandising systems. Also, a higher mix of e-commerce sales had a negative impact on the company’s gross margin. Ulta Beauty’s fiscal 1Q17 gross margin benefited from the leverage in fixed store costs on strong sales.

The company’s operating margin grew 60 basis points to 14.3% in fiscal 1Q17. The company’s operating margin was favorably impacted by the leverage in advertising and corporate overhead expenses on higher sales volume.

Fiscal 2017 margins

The company’s fiscal 2017 gross margin might be under pressure due to a higher mix of e-commerce sales. Some of Ulta Beauty’s prestige brands contribute higher sales dollars but are dilutive to the margin rate. Higher sales from such brands might adversely impact the company’s margin. The company’s fiscal 2017 operating margin is expected to increase by 20 to 30 basis points.

We’ll look at analysts’ expectations for Ulta Beauty’s fiscal 2Q17 earnings in the next part of this series.

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