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Will Ulta Beauty (ULTA) Stock Sustain Solid Momentum in 2021?

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Zacks Equity Research
·5 min read
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Ulta Beauty, Inc. ULTA appears to be in a good shape, courtesy of strength in the skincare category as well as focus on omnichannel operations. Also, the company’s commitment to its five key priorities is noteworthy. Thanks to such upsides, this Zacks Rank #3 (Hold) stock has rallied 21.3% in the past three months compared with the industry’s rise of 13.1%.

Let’s delve deeper into these factors and see if they can help this beauty retailer counter headwinds related to the pandemic and sustain its robust momentum in 2021.

Factors Working Well for Ulta Beauty

Ulta Beauty has been seeing market share gains in major beauty categories for a while now, with skincare standing out. The skincare category remained well placed in the third quarter of fiscal 2020 and saw positive comps growth on the back of brands like The Ordinary, TULA, First Aid Beauty and La Roche-Posay, to name a few. 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.



Further, Ulta Beauty is known for its strategy of striking the right balance between online and physical stores. Management anticipates opening about 30 stores in fiscal 2020 alongside undertaking nearly five relocation projects. While fiscal 2021 plans are not finalized yet, management anticipates opening at least 30 stores, though the plans will continue to be assessed according to the economic conditions and costs, among other factors. Apart from this, management remains encouraged about its planned partnership with Target TGT in 2021. The company said that it plans to introduce Ulta Beauty at Target next fall, which will be a shop-in-shop experience online as well as in certain Target locations.  

Moving on, the company is undertaking measures to strengthen its omnichannel presence. To this end, the company launched buy online and pickup curbside at 70 stores in nine states in April 2020, which is generating solid results. In the third quarter, the company opened the Jacksonville fast fulfillment facility, extending the ship-from-store capacity to 105 stores, and expanded e-commerce operations in its distribution centers at Chambersburg, Greenwood and Dallas. Such investments have elevated Ulta Beauty’s e-commerce shipping capacity and are likely to enhance its delivery speed. Additionally, the company concluded rolling out the new booking tool for services in its app and on ulta.com during the quarter under review. Certainly, the company’s e-commerce channel remained strong amid the pandemic. Markedly, sales from e-commerce operations soared 90% in the third quarter, with continued strength in the BOPIS initiative, which formed 16% of the company’s e-commerce sales.

We also commend the company’s focus on its five strategic priorities. 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, as discussed above. Next, 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. Moving on, the company is focused on fueling innovation at its Ultamate Rewards program in several ways. Finally, management is committed to optimizing its cost structure. As part of this, the company decided to suspend its Canadian expansion during the third quarter of fiscal 2020.

Roadblocks

The company began the fourth quarter with roughly all stores open for retail. However, management warned that due to the resurgence in coronavirus cases, market-specific government limitations may increase, leading to lower operating hours, restrictions on in-store capacity and mandatory store closures in a few cases. The company on its last earnings call said that while it is well placed for the holiday season, the operating landscape remains dynamic. For the fourth quarter, management expects a 12-14% decline in comparable store sales.

Apart from this, costs associated with COVID-19 are concerning. Management expects to incur costs in the range of $180-$190 million toward PPE and operating costs related to COVID-19 in fiscal 2020. Additionally, the company has been seeing soft makeup sales for a while. Delayed innovation along with reduced makeup usage due to masks as well as the pandemic-led social distancing and fewer outings remains a worry for the makeup category. However, categories focusing on areas above the mask, such as lashes, eyes and brows have been performing well.

All said, we expect strength in skincare as well as the company’s omnichannel presence to help it tide over the abovementioned hurdles and sustain growth in 2021.

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