Ulta Beauty misses earnings estimates after reporting drop in demand

30 Aug 2024 --- Ulta Beauty falls short of Wall Street’s quarterly performance estimates, citing growing market competition from the diversifying omnichannel playing field, particularly for premium beauty. The highly-anticipated report comes out just days after it was revealed that Warren Buffett’s conglomerate, Berkshire Hathaway, purchased about 690,000 Ulta Beauty shares this month, worth about US$266 million.

While the US beauty retailer managed a slight lift in quarterly net sales, driven primarily by new store openings, underlying metrics reveal a slowdown with comparable sales for stores open at least 14 months and through e-commerce dipping 1.2%.

The retailer also saw a 1.8% decrease in transactions, suggesting fewer customers are visiting Ulta Beauty’s brick-and-mortar shops and online marketplace.

Disappointing comparable store sales

Ulta Beauty CEO Dave Kimbell remains “clear about the factors” that adversely impacted the company’s store performance:

“While we are encouraged by many positive indicators across our business, our second quarter performance did not meet our expectations, driven primarily by a decline in comparable store sales,” he says.

A dip in transactions suggest fewer customers are visiting Ulta Beauty’s brick-and-mortar shops and online marketplace.“We are focused on driving stronger sales and traffic and continuing to exercise financial discipline. In light of our first-half trends and a more cautious outlook, we have updated our full- year expectations. I remain confident in the power of our differentiated model, the strength of our financial foundation, and our ability to deliver value for our shareholders over the long term.”

Ulta Beauty’s net sales in the second quarter increased 0.9% to US$2.6 billion (compared to US$2.5 billion in the previous year), primarily due to new store contributions and growth in other revenue.

However, gross profit of US$978.2 million is lower than the US$993.6 million reported in the same period last year.  The company blames lower merchandise margins and deleverage of store fixed costs, but says it was partially offset by growth in other revenue and lower inventory shrink.

Operating income was US$329.2 million, or 12.9% of net sales, compared to US$391.6 million, or 15.5% of net sales in the previous year. Net income was US$252.6 million compared to US$300.1 million.

Rising omnichannel competition

On the earnings call, Kimbell addressed the unsatisfactory results while emphasizing rising competition from other diversified prestige beauty sales channels. “We do not believe these results reflect the strong engagement with our brand, the strength of our operating model, or the performance I know we can deliver over the longer term.”

“There are significantly more places to buy beauty, especially prestige beauty, with more than 1,000 new points of distribution opened in the last three years. As a result, our market share continues to be challenged, particularly within prestige beauty.”

The online space is growing more competitive with bigger rivals such as Walmart ramping up their presence.  The world’s largest retailer is trying to grow its online footprint with the launch of Premium Beauty. It will be integrated within Walmart’s digital marketplace and include over 20 new brands like Cosrx, T3 and Beachwaver in addition to its existing assortment of skin care products and hair tools.

Chantecaille recently announced a domestic partnership with Tmall (Alibaba Group), China’s leading online retail platform. Meanwhile, Shiseido’s Drunk Elephant deployed its new “DrunkGPT” chatbot to enhance customer interactions with “24/7 AI-powered” responses to skin care inquiries — from product recommendations to beauty tips.

LVMH Group also recently extended its partnership with Alibaba Group to grow its luxury presence online.

However, the value of traditional brick-and-mortar avenues may not all be lost on Ulta Beauty. In the second quarter, the retailer opened 17 new stores, relocated one, remodeled nine and closed one store.

According to the earnings report, the company has 1,411 stores totaling 14.8 million square feet.

By Benjamin Ferrer