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Ulta Beauty (ULTA) Poised on Core Priorities Amid Low Traffic

Zacks Equity Research
·5 min read

Ulta Beauty, Inc. ULTA is likely to benefit from its focus on key priorities. Further, the company has been gaining from its loyalty program and strength in the skincare category. These upsides have been aiding the company amid coronavirus-related concerns like sluggish traffic and escalated costs. Also, Ulta Beauty’s makeup category sales have been soft for a while. Let’s delve deeper.

Focus on Core Strategies

The company’s foremost priority is to strengthen its omnichannel business and explore the potential of both physical and digital facets. The pandemic has, in fact, speeded up this process for the company, given consumers’ increased online engagement. Markedly, sales from e-commerce operations soared more than 200% in the second quarter on the back of solid curbside pickup and buy online pickup in store services that represented nearly 20% of total e-commerce orders.

The company is undertaking various tools to enhance the experience of guests, like offering a virtual try-on tool and in-store education, and reimagining fixtures, among others. Further, the company concentrates on offering customers a curated and exclusive range of beauty products through innovation. Toward this end, the launch of Conscious Beauty at Ulta Beauty is likely to be fruitful. Moving on, the company is focused on fueling innovation at its Ultamate Rewards program in several ways. Additionally, management is committed to optimizing its cost structure.

Category Performance

Ulta Beauty has been seeing market share gains in major beauty categories for a while now, with skincare standing out. Skincare recorded the highest growth in fiscal 2019, among all other categories, and remained Ulta Beauty’s fastest-growing category. The skincare category remained well placed in the second quarter of fiscal 2020 as well, wherein sales increased year over year. Consumers’ increased focus on skincare and hair amid higher at-home grooming is likely to keep aiding this category. Management remains focused on boosting skincare growth by strengthening the brand portfolio and undertaking digital innovation.

However, the company’s makeup category has been seeing challenges. In fact, the overall U.S. beauty market has been struggling with soft makeup sales trends.  In its second-quarter earnings call, management stated that the makeup category (which is the company’s largest category) remains under pressure due to consumers’ changing behavior as well as restricted innovation in categories. In the quarter, makeup sales, as a percentage of sales, contracted 400 bps to 43% on a year-over-year basis. Delayed innovation along with reduced makeup usage due to the pandemic-led social distancing and fewer outings is likely to keep makeup category growth troubled.

Will Pandemic-Led Hurdles be Countered?

Coronavirus-led temporary store closures weighed on Ulta Beauty’s comparable sales (comps) and sales in the second quarter of fiscal 2020. Though comps improved as the quarter progressed, it continued to decline year over year. In its conference call, management said that it expects full recovery to pre-pandemic levels will take some time. It anticipates demand to remain under pressure for the rest of the year, as it expects the ongoing pandemic-related hurdles to continue and the near-term landscape to remain dynamic. Further, the company is reducing its promotional activities, which may affect comps.

Additionally, management expects sluggish traffic this holiday season on account of coronavirus-related health and social distancing concerns among customers, limited store capacity and the company’s decision to keep stores closed on Thanksgiving Day this year. Given all the above-mentioned factors, Ulta Beauty expects comps to decline in the low-double-digits to mid-teens range in the second half of fiscal 2020. Apart from this, Ulta Beauty incurred additional COVID-19-related costs of about $135 million in the first six months of fiscal 2020. It expects to incur costs in the range of $35-$40 million in the second half of fiscal 2020 for PPE and other expenses related to COVID-19.

Nonetheless, the company is well on track with undertaking actions to manage its business amid the pandemic. To this end, it has reopened stores with limited capacity and reduced hours to maintain social distancing. Also, it has implemented Shop Safe standards across all stores. These along with a focus on core strategies and skincare category strength are likely to aid this Zacks Rank #3 (Hold) company.

Shares of Ulta Beauty have rallied 20.9% in the past three months compared with the industry’s growth of 13.4%.  

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