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Ulta Beauty is banking on Kim Kardashian's 147 million Instagram followers to save it

Brian Sozzi
Editor-at-Large

Ulta Beauty (ULTA) is banking on the celebrity power of Kim Kardashian to get investors excited again after a lackluster second quarter and brutal earnings warning that sent the stock spiraling lower.

Ulta CEO Mary Dillon confirmed to analysts on a conference call Thursday evening that KKW Beauty by Kim Kardashian West will launch this quarter. Dillon says the product line will feature 57 overall items, including the “most iconic” ones for Kardashian West including a contour and highlight kit, lipstick and various eyeshadow palettes. Two new exclusive cosmetic kits under the brand are expected for the holidays.

“Kim is one of the strongest forces in pop culture and we are very excited to extend our partnership with her,” Dillon said.

For Ulta’s sake, Kardashian’s entire Instagram following better show up to the store the first week of the makeup line’s debut.

Kim Kardashian West attends KKW Beauty at ULTA Beauty at Courtyard at the Commons on December 6, 2018 in Calabasas, California. (Photo by Stefanie Keenan/Getty Images for KKW Beauty)

Shares of Ulta Beauty — a longtime market darling due to its impressive growth rates — cratered 25% on Friday as Dillon warned about the state of the U.S. cosmetics market. With recent product launches failing to drive excitement among customers, Dillon has seen a slowdown in cosmetics purchases start to take hold.

It’s unclear when the tide will turn. But cosmetics represent about 50% of Ulta’s business, so any downturn is unwelcome news.

Cosmetics business is decelerating

“It's clear that cosmetics and the overall U.S. market is challenged. After several years of very strong performance, growth in the makeup category has been decelerating over the last two years, but recently turned negative,” Dillon explained. Ulta estimates that cosmetics sales have dropped by a mid-single digit percentage in the first half of 2019 — volatility has stretched into the third quarter.

“We believe that the main issue driving this softer cycle in cosmetics is that the newness and innovation that have been the focus of most brands this year has just not driven the kind of incremental growth we've enjoyed for some period of time,” said Dillon.

“Over the past several years, we've seen strong growth in cosmetics driven by new rituals and application techniques, like contouring and brow styling, and innovative new product formats like liquid lip, palettes and minis,” she added. “This innovation resulted in new makeup routines requiring new products which drove strong incremental growth. The most recent cycle of innovation has just not driven those behaviors resulting in a soft cycle for the cosmetics category in the U.S. as innovation and newness price the market has not driven the expected growth.”

Results shocked Wall Street

The pressure was seen throughout Ulta’s earnings day press release.

Same-store sales rose 6.2%, cooling from 8.1% gain delivered in the year ago quarter. Ulta now sees full-year same-store sales growth of 4% to 6%, compared to 6% to 7% previously.

Full-year earnings are projected to be $11.86 to $12.06 a share. Ulta had forecast $12.83 to $13.03 a share.

Ulta’s overall report generally shocked Wall Street, which tripped over themselves Friday to issue downgrades on what had been a growth stock.

“For a company that has been one of the most consistent models across our universe over the past five-plus years, today’s results were about as shocking as one could imagine,” wrote Wells Fargo analyst Ike Boruchow. The analyst slashed his rating to Market perform from Outperform and price target to $235 from $350.

“With their top-line pressured from a challenging landscape, we fear that Ulta’s margin structure may not be equipped to cope with more moderate comps, and could see meaningful deleverage if top-line doesn’t improve (which we believe will be challenging given industry pressures),” Boruchow added.