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Ulta Beauty (ULTA) Poised on Digital Efforts & Skincare Unit

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Amid the jittery backdrop, Ulta Beauty, Inc. (ULTA - Free Report) has been strengthening its omni-channel capabilities. Moreover, management’s focus on its five strategic priorities coupled with strength in the skincare category has been catalyst.

Strengths

Ulta Beauty is known for its strategy of striking the right balance between online and physical stores. Amid the rising online competition, Ulta Beauty has managed to grow both e-commerce and in-store sales. Apparently, management anticipates opening about 30 stores in fiscal 2020 alongside undertaking nearly five relocation projects.

The company is undertaking measures to strengthen its omni-channel presence. To this end, it has also launched buy online and curbside pickup facility across 70 stores in nine states last April.

In fact, Ulta Beauty’s store-to-door strategy has been yielding results. It has also expanded e-commerce operations across several distribution centers. Such investments have elevated Ulta Beauty’s e-commerce shipping capacity and are likely to enhance its delivery speed.

Additionally, the company concluded rolling out the new booking tool for services in its app and on ulta.com. Encouragingly, sales from e-commerce operations soared 90% during third-quarter fiscal 2020, with continued strength in the buy online, pickup in store initiative that accounted for 16% of the overall e-commerce sales.

Oncoming to Ulta Beauty’s five strategic priorities, its foremost concern is to strengthen its omni-channel business and explore the potential of both physical and digital facets. It has also been undertaking various tools to enhance guests’ experience like offering a virtual try-on tool and in-store education, reimagining fixtures, and more.

Ulta Beauty is committed toward offering customers a curated and exclusive range of beauty products through innovation. It is focused on fueling innovation at its Ultamate Rewards program. Finally, management is committed to optimizing its cost structure.

Meanwhile, Ulta Beauty is seeing market share gains in major beauty categories, with skincare standing out. Markedly, skincare recorded the highest growth in fiscal 2019 among all other categories and remained Ulta Beauty’s fastest-growing category. Management increased selling space and stores alongside improving its marketing efforts to support skincare growth.

We expect this category to continue benefiting from brands like The Ordinary, TULA and Beekman 1802, CeraVe, First Aid Beauty and La Roche-Posay. Consumers’ increased focus on skincare and hair amid higher at-home grooming is likely to keep aiding this category.

Challenges

Despite these upsides, there remain some headwinds mostly due to the pandemic. Ulta Beauty began fourth quarter with roughly all stores open for retail. However, management had earlier cautioned that due to the resurgence in coronavirus cases, market-specific government limitations may increase, leading to lower operating hours, restrictions on in-store capacity and mandatory store closures in a few cases. That said, management had projected a 12-14% decline in comparable store sales for the same quarter.

Further, the company has been seeing soft makeup sales due to shifts in consumer behavior as well as innovation and newness delays. Also, costs related to the pandemic are concerning. Management had estimated incurring costs in the range of $180-$190 million toward PPE and operating costs related to COVID-19 in fiscal 2020.

Final Thoughts

Nonetheless, management is making cost-optimization efforts. These are likely to address cost concerns going ahead. Moreover, we believe that Ulta Beauty is well placed to maneuver the pandemic given strength in its omni-channel capabilities. Its skincare category will continue to deliver healthy performance.

Impressively, this Zacks Rank #3 (Hold) stock has advanced 43.8% compared to the industry’s 29.4% rally in the past six months. The company’s long-term expected earnings growth rate of 11.6% is also noteworthy.

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