The cast reaches for the mailbag in this segment from Industry Focus: Consumer Goods. Listener Joseph wants to know why Estée Lauder (EL -1.26%) and Ulta Beauty (ULTA -2.12%), both leading names in the skincare and cosmetics industry, have seen their stocks move in opposite directions over the past year.
Vincent Shen and senior Motley Fool contributor begin their answer with background on Ulta's business model.
A full transcript follows the video.
This video was recorded on April 17, 2018.
Vincent Shen: In case you missed our discussion last Tuesday, we dedicated the episode to Estée Lauder. That company came onto our radar as a result of being one of the best-performing stocks in the consumer and retail space in the past year. The stock was up almost 80%. And not only that, but this is a more than a $50 billion company. It's even rarer to see a large-cap name enjoy such an incredible run in just one year. That's a really interesting business. If you missed the show, definitely go back and check it out.
But as a follow-up to that episode, we have a related listener question. That brings us back to the skincare and cosmetics industry. It's been a while since we've actually turned to the mailbag during our show. Here's the question we received from listener Joseph. He said:
We hold Ulta and have watched its stock go on sale over these months, unfortunately. It was interesting that Estée Lauder hadn't listed them as a competitor. I guess these companies thrive together, then. Both are staking their growth on premium products like MAC, for example. I hadn't anticipated anything like the decline in Ulta, and I'm further surprised at its contrast with Estée Lauder. Can you square the market's perspective here?
For listeners, to have a little big picture context, keep in mind that Estée Lauder shares are up nearly 80% in the past year, as I mentioned previously, and management has been putting up very strong guidance for the next several years with double-digit earnings growth, accelerating top line growth. On the flip side, Ulta Beauty, ticker ULTA, its shares have declined about 20% over the same timeframe, and that slide actually increases to 25% if you go off the all-time high that the stock hit last May. Given that both of these companies specialize in skincare and cosmetics, why the big divergence in their performance and results over the last year is definitely a fair question.
Before I hand it off to you, Asit, to introduce the company and provide a little bit of an overview of that business, I wanted to note that we discussed Ulta previously on Industry Focus last June, and we had named it as one of our picks for best-in-class brick-and-mortar retail, and that was pitched by our summer intern at the time, Addie. So as part of our Ulta discussion now, we're going to be able to look back and see how much has actually changed in just a year's time, and call out some of the things that we discussed last summer, and we'll get back to that. Asit, kicking things off for us, can you give us a quick overview of this business?
Asit Sharma: Ulta was founded in 1990, and it bills itself as the largest beauty retailer in the U.S. It has 20,000 products available in its stores spanning over 500 brands. This company hits all price points, from entry-level up to prestige beauty products. Ulta has 1,074 stores in 48 states, and this is primarily how it distributes products. The typical store is an open layout store, it's around 10,000 square feet, and most Ulta stores have in them an in-house full-service salon, which is about 950 square feet.
Ulta reaches out to its customers through pretty traditional channels. It uses mail advertising, newspaper inserts, traditional marketing. The really interesting thing about its marketing reach, however, is that it has 28 million customers that are enrolled in its loyalty program, and the company says that it gets 90% of sales from these customers who are enrolled in that program. So, that was very impressive to me. That's called the Ultamate Rewards program.
It also has e-commerce sales. Everyone has to know, whether you're a brick-and-mortar store or a mixed-blend type of retailer, you have to be in e-commerce. These sales comprise roughly 10% of revenue. In the last year, Ulta sold about $5.8 billion worth of products, and about 10% of that, about $580 million, was through e-commerce. Now, that channel is growing at a pretty rapid clip, about 65% a year. Of course, it's still very small compared to the traditional brick-and-mortar layout that it has.
Competition, the company doesn't really list direct competitors in its annual report, but since it straddles this whole realm of entry-level to high-end products, its competitors exist as freestanding mass merchandisers, drug stores, also boutiques. So any physical retail outlet that you can think of that might sell beauty products is a potential customer to Ulta. And that's a general overview of this company.