Stock Market Analysis

Ulta Beauty Is Rethinking the Spa and Shopping Experience in the Wake of COVID-19

Close personal contact and an interactive testing playground have been hallmarks of its stores, but public health concerns will require a new shopping approach.

This article originally appears on The Motley Fool, written by Demitrios Kalogeropoulos

Investors had been bracing for bad news from Ulta Beauty’s (NASDAQ:ULTA) first-quarter earnings report, as the retailer’s store base was closed for most of the three-month period that ended in early May. The spa and beauty products specialist recently confirmed those fears by revealing a sharp drop in sales and an $80 million loss.

There were some bright spots in the chain’s recent performance, though, which CEO Mary Dillon and her team discussed in a conference call with analysts on May 28. Below, we’ll look at some highlights from that chat, including why Ulta is optimistic about the COVID-19-related changes they’re making to the shopping experience.

Good momentum before the crisis

We were pleased with our performance in the beginning of the quarter, with total company comp sales trending above our plan through March 10. However, we began to experience [softer] traffic as consumers became concerned about the spread of the virus, and we subsequently closed all of our stores on March 19.
— CFO Scott Settersten

Ulta said sales growth was outperforming management’s modest expectations through early March. That momentum showed up in positive comparable-store sales, rising market share, and big gains in the chain’s loyalty rewards program. Yet the store closures wiped out those gains, with comps diving 62% from March 11 through May 1.

The company doubled its e-commerce sales, which cushioned the overall blow to the business. But in-person purchases account for about 80% of the business, and those opportunities disappeared. “We’re excited about the opportunity to maintain strong engagement with these new guests,” Dillon said, “as our operations fully reopen.”

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Cash updates

The situation with COVID-19 is dynamic and fluid, so our first priority has been to protect liquidity.
— Settersten

The collapse in sales produced an $80 million loss for the period, compared to a $192 million gain a year ago. Operating cash flow worsened significantly, swinging to a $24 million burn compared to the generation of $272 million last year.

Ulta responded to that challenge by taking on over $800 million in new debt and preserving cash by suspending its stock buyback program and reducing capital investment plans. Those moves, plus quick changes to the retailer’s inventory purchasing patterns, have left it in solid financial shape to withstand most economic scenarios that might play out over the next year or so. Ulta counts $1.15 billion of cash on hand today compared to $326 million a year ago.

A new normal

Concerns about personal safety and close contact caused by COVID-19 will require the beauty experience to change in the short term but will also likely spark longer-term innovation. We’re reimagining the guest experience in product discovery and looking at ways technology, services, and the role of our associates can evolve to create a new “wow” experience for our guests.
— Dillon

Ulta Beauty is facing fundamental challenges to its business related to the close personal contact that forms the basis for the beauty shopping and spa experience. The company counts that experience as one of its biggest competitive assets because it allows guests to “discover and play” across a wide selection of skincare, makeup, and self-care products.

COVID-19 will hurt the retailer’s ability to deliver that playground after stores reopen. Executives see technology like its GLAMlab digital tool as helping bridge the gap while employees are restricted from interacting closely with customers. The chain is also making big changes to its salon segment, including mandatory protective wear and social-distancing limits. These efforts are likely to impact the Ulta shopping experience through 2020 and into the next fiscal year.

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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ulta Beauty. The Motley Fool has a disclosure policy.

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