Beauty stocks aren't the typical hot tech stocks that capture mass investor attention. But investors who know how to spot opportunity understand that great stocks can be found anywhere, from your local garbage disposal company to your favorite lipstick brand.
Estée Lauder (EL 1.70%) and Ulta Beauty (ULTA -0.40%) are two of the biggest cosmetics companies around. Let's see which one is the better buy today.
The case for Estée Lauder: The best brands
Most people would recognize the Estée Lauder name or one of the many upscale brands it owns, such as MAC cosmetics, Clinique, and the new Tom Ford brand. It's much bigger than Ulta by sales, with $16 billion in trailing-12-month revenue vs. Ulta's $11 billion.
It's also much more profitable, with net income not only close to double Ulta's but with a wider operating margin as well.
ULTA Net Income (Annual) data by YCharts.
Estée Lauder is a decades-old company with strong brands and efficient operations, and it pays a dividend. In other words, it's a typical value stock that handily beat the market for years. However, it's really struggling right now. As a luxury company, it charges high prices, but most of its products are within range for many budgets, which is typically a good thing for business.
In this inflationary climate, though, it's not luxurious enough to rely solely on customers who aren't impacted by inflation, and it sells the kind of products customers can easily switch down from when they're pinching pennies.
In its fiscal 2023's third quarter (ended March 31), sales declined 12% from last year. Management blamed it on a slowdown in the Asian travel business, and it looks like sales are picking up in other places. They increased 6% in the American region and double digits in the Latin American region although they were down 24% in Europe, impacted by the Asian travel business.
It also operates several product segments, which were all up except for skincare, which dragged down the whole with a 20% decline. This doesn't look like anything big to worry about. It's being affected by external headwinds, but it should jump right back into better performance when retail picks up globally.
The case for Ulta: Fast-growing and popular
Ulta has a different operating model than Estée Lauder. It's a retailer of other brands, in contrast with Lauder's wholesale and direct-to-consumer business. It's quite young, but it has grown quickly.
Ulta operates a chain of beauty stores and has successfully managed to sell a large range of brands at different price points, from expensive brands like the ones Estée Lauder owns to more common pharmacy-type brands. It runs more than 1,350 stores as well as digital channels, and it recently partnered with Target to operate stores-within-stores.
It has differentiated itself both through this model as well as its on-site beauty services. The services are an important part of the business because customers who use services buy more products -- 50% of customers who come in for a service also buy a product that day, and service customers spend three times the amount of non-service customers.
Ulta has been posting sales increases despite inflation. Sales rose 12% over last year, and comparable sales were up 9% in the first quarter (ended April 29). Earnings per share (EPS) increased from $6.30 to $6.88.
However, it has seen expenses rise in this environment, and the operating margin contracted from 18.7% last year to 16.8% this year. It also lowered its guidance for full-year operating income from 14.7% to 15% to 14.5% to 14.8%.
Which stock is the better buy today?
Both of these stocks are out of favor with Wall Street right now. Estée Lauder is down 33% this year, while Ulta is down 5%. At these prices, Estée Lauder trades at 55 times trailing-12-month earnings, and Ulta trades at only 18.
I see Estée Lauder making a comeback soon enough and the valuation moving in line with improved earnings. However, Ulta looks like it has a long growth runway, and its margins should stabilize as revenue increases and the retail market improves. At this price, it looks like a great deal, so I would choose Ulta in this contest.
