Like several other retailers, Ulta Beauty, Inc. (ULTA - Free Report) 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%.
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