Like several other retailers, Ulta Beauty, Inc. ULTA came under the purview of coronavirus-led disruptions. Temporary store closures and cost deleverage weighed on its second-quarter fiscal 2020 performance, wherein both top and the bottom lines declined year over year. Although comparable sales or comps improved as stores reopened, it continued to decline year over year. Soft makeup sales have also long been a concern for Ulta Beauty.
Nevertheless, the skincare category has been reflecting strength owing to the increased at-home grooming amid the pandemic. Also, the beauty retailer has been gaining from its focus on five key priorities, with the foremost one being strengthening the omnichannel business and exploring the potential of both physical and digital facets. Certainly, these moves bode well amid the pandemic-led social distancing trends and sluggish traffic. Let’s delve deeper.
Factors Dulling Ulta Beauty’s Gleam
Coronavirus-led store closures weighed on Ulta Beauty’s comps and sales in the second quarter of fiscal 2020. Though comps improved as the quarter progressed, it continued to decline year over year. The metric that declined 37% in May, dropped 10% in July as stores had reopened. In the first three weeks of August, comps were down in mid-single digits. In its conference call, management said that it expects full recovery to pre-pandemic levels to 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, the company’s makeup category growth is likely to be troubled due to delayed innovation along with reduced makeup usage due to social distancing.
Although SG&A expenses (as a percentage of sales) improved year over year in the second quarter, it was adversely impacted by a deleverage stemming from lower sales due to COVID-19 and higher costs associated with growth-related investments. Markedly, 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 toward PPE and costs related to COVID-19.
Focus on Omnichannel & Other Saviors
Ulta Beauty remains focused 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. 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 also 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 this fall (across all stores and online) is likely to be fruitful. Moreover, the company is focused on fueling innovation at its Ultamate Rewards program in several ways. Finally, management is committed to optimizing its cost structure.
Apart from this, Ulta Beauty is poised to continue benefiting from its skincare category. In fact, the skincare category remained well placed in the second quarter of fiscal 2020, wherein category 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.
We believe that these upsides are likely to help this Zacks Rank #3 (Hold) company overcome the aforementioned barriers. Markedly, shares of Ulta Beauty have gained 9.3% in the past three months compared with the industry’s growth of 14.2%.
3 Key Picks
DICK'S Sporting Goods DKS, with a Zacks Rank #1 (Strong Buy), has a trailing four-quarter earnings surprise of 15.5%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
MarineMax HZO has a considerably high trailing four-quarter earnings surprise, on average. The stock sports a Zacks Rank #1.
Hibbett Sports HIBB, with a Zacks Rank #1, has a long-term earnings per share growth rate of 13.8%.
These Stocks Are Poised to Soar Past the Pandemic
The COVID-19 outbreak has shifted consumer behavior dramatically, and a handful of high-tech companies have stepped up to keep America running. Right now, investors in these companies have a shot at serious profits. For example, Zoom jumped 108.5% in less than 4 months while most other stocks were sinking.
Our research shows that 5 cutting-edge stocks could skyrocket from the exponential increase in demand for “stay at home” technologies. This could be one of the biggest buying opportunities of this decade, especially for those who get in early.
See the 5 high-tech stocks now>>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Ulta Beauty Inc. (ULTA): Free Stock Analysis Report
DICKS Sporting Goods, Inc. (DKS): Free Stock Analysis Report
Hibbett Sports, Inc. (HIBB): Free Stock Analysis Report
MarineMax, Inc. (HZO): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.