Beauty boost: Retail giant Ulta beats expectations with US$2.5B Q3 sales

05 Dec 2023 --- Beauty appears to be more than skin deep — even recession-proof. Consumers fighting high inflation with thinner wallets may have sought solace in small expenditures at retailers like Ulta Beauty. 

The beauty retail giant surpassed analysts’ expectations with solid third-quarter results, reporting net sales of US$2.5 billion, up 6.4% year-over-year, thanks partly to higher comparable sales and strong new store performance. The stock rose after the company released results that pleased analysts. 

Darren Sissons of Campbell, Lee & Ross Investment Management in Toronto is also happy with the results and tells Personal Care Insights Ulta has been solid for quite some time. 

“Ulta Beauty shares had a strong outperforming run since 2021. From an earnings perspective, it has delivered. The company is a structural earnings grower.” 

Skin care shines
Skin care remains Ulta Beauty’s fastest-growing category, driven by double-digit growth in mass and prestige segments. CEO Dave Kimbell said on an earnings call, “Beauty enthusiasts have maintained their skin care routines while experimenting with new regimens.”

Ulta Beauty has surpassed analysts’ expectations for its third-quarter financial report.“Consumer interest in moisturizers, serums, and cleansers is driving growth, and brands leading into these trends like Drunk Elephant, Good Molecules, and COSRX contributed to our strong results. Dermatologist-recommended brands also continued to resonate, driving growth for brands like La Roche-Posay, Cetaphil, and Dermalogica.”

B2b partnership with Lush
Lush recently entered wholesale distribution for the first time, partnering with Ulta to sell its products in select US stores. Lush sees this as a big step since it has traditionally drawn loyal customers to its bricks-and-mortar stores and website. The cosmetics company says it’s keen to gain access to Ulta Beauty’s reach with over 1,300 stores in the US.

As for Ulta, a more comprehensive range of products may be one reason why the company says its loyalty program is now at a record 42.2 million members.

Recession-proof beauty
Beauty retail companies like Ulta and Sephora (owned by LVMH) are seen as recession-proof in an environment where many consumers choose to cut back on goods and services deemed too expensive in an inflationary environment.

Sissons also owns shares in Sephora (LVMH) as well as L’Oreal. He likes the cosmetics and broader luxury markets due to their “defensive attributes in a recession. The sector typically grows on an organic and new store openings basis.”

Amazonian headwinds
Ulta has been investing in its e-commerce platform with positive results. Kimbell sees e-commerce growing “at a higher rate than brick-and-mortar next year and the years to come, and so that will be a headwind for us in gross margin.”Lush entered wholesale distribution with Ulta.

Companies like Ulta and Sephora are looking squarely at their online retail rival, Amazon. So far, the beauty sector continues to shine — especially in Europe. 

“Amazon is a category killer, but the American business model has a poor track record in Europe. Big box stores have not fared well in Europe [amid] a range of discount retailers such as Aldi and its own internet retailing businesses selling cosmetics,” says Sissions. 

“Europe is also home to major European cosmetic brands. While Amazon is a threat in many categories, the personal sales approach of cosmetics likely means a heavy support infrastructure will be needed to compete effectively in Europe with the likes of Sephora, which is owned by LVMH and others.”

Sissons is closely monitoring the sector to see how much of the beauty companies’ growth was attributed to the pandemic lockdowns. Right now, “it’s a little early to tell,” but he sees Ulta Beauty’s stock as “reasonably valued at this stage.”

By Anita Sharma