The largest U.S. beauty retailer has undoubtedly suffered because of the pandemic, but can it give its business a makeover and become a good investment?
Ulta Beauty (NASDAQ: ULTA) is a huge business that offers a range of products including makeup, fragrance, haircare, skincare, and salon services. The company was forced to close all of its 1,254 physical stores in March due to the coronavirus, which was reflected in its recent earnings as sales slumped by one-third for the first quarter of 2020.
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However, as the economy reopens, is there a case for investing in Ulta Beauty?
The bull case for Ulta Beauty
Ulta has upped its e-commerce game, seeing online sales double in Q1, which softened the overall damage to the company at this extremely volatile time, especially considering that in-store purchases usually make up 80% of its business. Ulta Beauty has obviously seen the success of e-commerce for companies other than the usual big names — Amazon (NASDAQ: AMZN), eBay (NASDAQ: EBAY, and Shopify (NYSE: SHOP) — and says it will be speeding up its investments to expand its shipping capabilities in the future. It’s also likely there will be more demand for a click and collect style purchases.
Its subscription base is another area where Ulta Beauty is seeing success, with more than 33 million active members who make up about 95% of Ulta’s total sales. Also, Ulta is utilizing its Beauty app and GLAMlab tool that is helping customers match its foundation, try on makeup and play with lashes and hair colors remotely. This is also likely to help drive e-commerce sales as well. The beauty company has around $1.15 billion in cash on hand, not bad at all considering it only had $326 million a year ago.
The bear case for Ulta Beauty:
Ulta Beauty does face a big financial challenge after it posted an $80 million loss compared to a $192 million profit at the same time last year. However, the company did act quickly and preserved its cash by suspending its stock buyback program and lowered its capital investment endeavors. This is a good move considering it could be some time before store operations pick back up.
Another challenge that Ulta Beauty faces will be how it can implement social distancing measures and be able to sell products at the same rate. For instance, the usual techniques such as tester products and in-store makeovers could be a thing of the past. People are also scaling back social outings as many locations are still in lockdown, which means less of a need for beauty products.
Ulta Beauty also faces competition from other retailers including Sephora, owned by LVMH Moet Hennessy Louis Vuitton (OTC:LVMU.Y) — which is currently in the process of merging with Tiffany & Co. (NYSE: TIF). However, Sephora has about 24% market share, compared to Ulta Beauty’s 39%. Ulta is also going up against some big department stores that stock a variety of cosmetics, like Macy’s (NYSE: M), which has changed its shopping experience for consumers — all beauty services that require close contact are now suspended.
So, should I buy Ulta Beauty stock?
Now that stores have started to re-open, Ulta Beauty’s trends have already started to recover. It is also seeing continued strength from its online platform and while it may suffer in the short-term, the company should rebound in the long-term. Overall, Ulta Beauty has a strong name in the industry and its future plans and cash on hand should be a good step forward as the world adjusts to the new normal during the coronavirus. I would be buying this stock sooner rather than later before the price goes up.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.