Ulta Beauty, Inc. ULTA appears to be well placed for growth, thanks to its robust omnichannel business and strength in the loyalty program. The company’s skincare category has been doing well in particular, though the makeup business has been challenged. Further, the company recently reported first-quarter fiscal 2020 results, which reflected adverse impacts of store closures due to the coronavirus outbreak. The company is also seeing elevated SG&A costs.
Nonetheless, Ulta Beauty has started reopening stores. It had 333 stores open for visitors and 840 stores offering curbside pickup as of May 28. The company also stated that it is seeing greater-than-expected sales in reopened stores. Management plans to continue reopening stores and extend services in a phased manner, per the regulatory guidelines. We note that the company is reopening stores with a lot of precautions and safety measures — including maintaining social distancing and enhancing sanitization. These factors are likely to keep customers flowing in.
Apart from this, Ulta Beauty is curtailing several costs and undertaking strong measures to protect its financial flexibility amid the pandemic. Let’s delve deeper.
Omnichannel Strength & Loyalty Program
Amid the rising online competition, Ulta Beauty has managed to augment both e-commerce and in-store sales. In first-quarter fiscal 2020, the company opened 11 stores, ending the quarter with 1,264 stores. Management anticipates opening 30-40 stores in fiscal 2020 alongside undertaking nearly three relocation projects. While the company temporarily closed all stores on Mar 19 due to the coronavirus outbreak, it kept its important online operations active. In fact, Ulta Beauty operated as a digital-only business for most parts of the first quarter and saw a higher-than-expected jump in e-commerce sales. Management noted that initial sales in the reopened stores reflect solid e-commerce penetration in BOPUS, ship to home and curbside pickup. Also on Apr 23, the company launched buy online and pickup curbside at 70 stores in nine states, which is generating solid results.
Ulta Beauty’s loyalty program has been a key business driver. Despite the store closures, the company’s active members for its Ultamate Rewards loyalty program rose 2% to 33.1 million in the first quarter of fiscal 2020. This can be accountable to the company’s excellent marketing and merchandising endeavors. The company is focused on personalization efforts through relevant product recommendations and replenishment to boost the loyalty program.
Hurdles in Ulta Beauty’s Way
Ulta Beauty has been battling rising selling, general and administrative (SG&A) expenses for a while. In first-quarter fiscal 2020, the company posted an operating loss of $101.5 million against an operating income of $237.5 million in the year-ago quarter. Notably, SG&A expenses (as a percentage of sales) escalated from 23.1% to 32.5% on account of a deleverage stemming from lower sales due to COVID-19. Pre-opening expenses grew 9.5% to $4.6 million. Also, gross margin collapsed from 37% to 25.9% due to fixed store cost deleverage, unfavorable channel mix shifts and deleverage of salon costs due to lower sales.
Further, net sales of this beauty retailer slumped 32.7% year over year to $1,173.2 million and missed the Zacks Consensus Estimate of $1,199 million in the first quarter. Sales were hurt by the coronavirus-led store closures. Comparable sales plummeted 35.3% and the company posted an adjusted loss of $1.12 per share against earnings of $3.08 reported in the year-ago period. The Zacks Consensus Estimate for earnings stood at 44 cents. The dismal performance can be accountable to lower sales and margins. Additionally, management stated that it expects challenges in the makeup category to persist in the near term due to increased social distancing, usage of masks and delayed innovation for this year.
Store reopening and solid online sales are likely to keep working well for Ulta Beauty. Further, consumers’ rising consciousness and stay-at-home trends bode well for the skincare business. These upsides along with cost-containment efforts are likely to fuel growth.
Shares of this Zacks Rank #3 (Hold) company have surged 47.8% in the past three months compared with the industry’s growth of 69.9%.
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