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Why Ulta Beauty Has Investment Potential

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·4 min read
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Ulta Beauty Inc (NASDAQ:ULTA) could deliver an improving stock price performance, in my opinion, following its 6% decline in the past year.

The beauty store retail chain is investing in its website, expanding into growth sectors and improving its loyalty program.

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Customer loyalty

Ulta Beauty is upgrading its loyalty program to catalyze sales among its existing members. For example, it has increased the amount of personalized communications it makes with its loyalty program members. This includes its use of targeted promotions that suggest new products for the program's members based on their previous shopping history, as well as the purchases made by other customers. This contributed to the retailer reporting an improvement in its member retention figures in its fiscal 2020 third quarter results, which could strengthen its competitive position.

In addition, Ulta Beauty is increasingly seeking to upsell its credit card to loyalty program members. It has found that members who obtain its credit card visit its stores more frequently and spend more on average per transaction. This could lead to an increase in the company's sales.

Online growth potential

Ulta Beauty released an updated version of its mobile app in the third quarter, which includes new features such as greater personalization and a simpler layout that make it easier for customers to access their latest offers and discounts.

In addition, the retailer's new app and website use a greater amount of artificial intelligence to enhance the shopping experiences of its customers. For example, the company's GLAMLab online service allows its customers to use virtual reality to try on different make-up styles and see what they would look like without physically applying them.

This experience is complemented by the company's investment in virtual beauty advisors that are available on its website and mobile app. They provide personalized recommendations based on the shopping histories of other consumers, and may lead to a higher order value among Ulta Beauty's online customers.

The business also launched Afterpay as a payment option on its website in the third quarter. Afterpay allows customers to buy now and pay later in interest-free instalments, which has resonated well with the retailer's millennial customers and could catalyze its sales performance in the upcoming quarters.

Potential challenges

The company's fiscal 2020 third quarter results were mixed. It continued to experience a slowdown in demand for its cosmetics products as part of a wider industry slowdown that has been present since 2017. For example, sales of its major cosmetics brands reported a low-single digit percentage fall in the third quarter compared to the same period of the previous year. This trend could continue, since the industry faces a lack of innovation and a lower number of new product releases that may lead to falling demand among consumers.

Ulta Beauty is expanding its investment in areas outside of cosmetics to offset the industry's disappointing outlook. For example, it has added more than 30 new skincare brands to its range of products in fiscal 2020, since the skincare sector is experiencing a high rate of demand growth among U.S. consumers. The company also expanded its skin bar services to over 100 additional stores in the third quarter. They provide its customers with the opportunity to try different skincare brands, which could increase the company's differentiation versus its sector peers.

Future prospects

Market analysts expect the company to post a 9.3% rise in its earnings per share in fiscal 2021. Its price-earnings ratio of 23 may not be cheap, but its growth strategy could catalyze its stock price in the upcoming years.

Disclosure: the author has no position in any stocks mentioned.

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This article first appeared on GuruFocus.