Like many companies, Ulta Beauty's (ULTA -13.37%) results were hurt by the COVID-19 pandemic. After all, many customers like going into stores and trying the product before making a purchase.
This wasn't lost on investors, of course. The share price was down by more than 40% for the year back in March. However, the stock has recovered, and it is now up by 12% year-to-date.
With COVID-19 cases surging again, has Ulta Beauty's shares gotten ahead of itself?
Ulta Beauty, which has been in existence for 30 years, has built a successful business by offering beauty products like cosmetics, fragrances, skin care, hair care, and salon services, across different price points. This allowed the company to attract its target customer, beauty enthusiasts, who account for 77% of the category's spending in the U.S. Previously, shoppers went to different types of stores, such as drug stores, mass merchants, and salons, depending on their budget.
This strategy has not only attracted customers; they are loyal, too. It has about 32 million customers signed up to Ultamate Rewards, the company's loyalty program. That's good, since management has found these members visit the stores more frequently and spend more.
Coming into this year, it had a long string of annual same-store sales (comps) increases., including a 5% rise last year. It is not just growing sales at the expense of profitability, either. Ulta's operating income grew from 2015's $506.3 million to $901.9 million in 2019.
Unfortunately, COVID-19 forced the company to shut its stores, which hurt sales, naturally. For its fiscal second quarter, which ended on Aug. 3, comps dropped by 26.7% However, there are reasons I believe this tough period will prove temporary.
People are coming back
For starters, Ulta reopened all of its stores by the end of July. It also offered salon and brow services, which help draw customers, in 88% and 85% of the locations, respectively. As stores reopened, people came back. You can see this in comps improving throughout the quarter. They went from down 37% in May to a mid-single-digit percentage decline in the first three weeks of August.
While no one knows if governments will reimpose restrictions that may hurt Ulta's short-term results, clearly, people still want Ulta's products and services. Ulta also recently announced an agreement with Target, providing another distribution channel.
In the meantime, management's long-standing focus on pushing omnichannel outreach has helped offset some of the loss of in-person sales. During the quarter, e-commerce sales grew by more than 200%.
Over the long haul, management has found that customers who use more than one mode to shop are very profitable. They order three times more than those who only shop at the stores.
This goes to show that when a company offers the right products, people will find a way to buy them. There's also room for expansion, with management planning to bring its U.S. store total to a range of 1,500 to 1,700 from the current 1,264.
While higher COVID-19 cases and the ensuing restrictions may hurt short-term results, affecting the stock price, for long-term investors that can ride out the volatility, the story remains compelling. Ulta's loyal customer base, broadly appealing products, and growth potential make this a good investment.