If you ask Dave Kimbell what's going on in the cosmetics space, the Ulta Beauty (ULTA +1.37%) CEO would say there's a general slowdown. And he's been saying it for months now.
Back at J.P. Morgan's 10th Annual Retail Round Up Investor Conference in April, Kimbell spooked investors when he said: "What we've seen so far is a slowdown in the total category across price points and segments. That's a bit earlier and a bit bigger than we thought." Ulta Beauty stock is down 26% since Kimbell said this.
Then, on May 30, Kimbell discussed Ulta Beauty's plan "To navigate near-term pressures" in the industry and the economy. In short, the company believes consumer spending is cooling off. However, I'm not sure that all cosmetics companies would agree that there's a general slowdown in the space.
NASDAQ: ULTA
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Co-founder and CEO of digital-first cosmetics retailer Oddity Tech (ODD 8.62%) Oran Holtzman asserted: "Over the last couple of months, we have heard some of our competitors talk about their businesses slowing. I want to be clear; we don't see any signs of slowing down in our platform." For Holtzman, spending is shifting from stores to online platforms like Oddity Tech. Oddity's evidence is its 39% net year-over-year revenue growth in the first quarter of 2024.
There are reasons to support Holtzman's analysis of the cosmetics space over Kimbell's. Another bit of evidence might be that e.l.f Beauty (ELF +4.85%) has a strong e-commerce business, accounting for 16% of its sales in fiscal 2024 (which ended in March). Its sales were up a whopping 77% during the fiscal year. That hardly seems like a total category slowdown. Then there's Sally Beauty Holdings (SBH +1.58%), which has thousands of stores that make up 90% of its sales. This company expects its sales to be flat this year, offering more evidence that sales are slow in stores.
It's likely there is at least some slowdown in consumer spending on cosmetics. But there is also solid evidence that sales are moving away from brick-and-mortar stores. These considerations would seem to bode poorly for Ulta Beauty stock.
Given all this anecdotal evidence, I have three predictions regarding Ulta Beauty stock:
First prediction: Spending on cosmetics will be fine
According to a 2023 survey from LendingTree, 75% of Americans say that cosmetics are important to them -- not 75% of women but rather 75% of everybody. Not only this, the same survey found that social media has caused almost half of people to spend more than intended in this area.
Social media usage is shifting toward short-term video, but cosmetics spending is not going away. And this survey result might explain why e.l.f. Beauty has been so successful by leveraging TikTok.
Even if there's a general slowdown in consumer spending, it seems that most people will pay for cosmetic products for the foreseeable future. Therefore, this category isn't going away and will likely grow with time.
Second prediction: Ulta Beauty will be fine
The cosmetics space isn't going away. And there's very good reason to believe that Ulta Beauty will continue to get its piece of the pie. Ulta Beauty expects its same-store sales to only grow by 2% to 3% this year. That's not much, and it has some investors worried it's losing market share. However, the company now has nearly 44 million loyalty members as of its fiscal 2024 Q1. That's up 6% year over year.
Loyalty members for Ulta Beauty are important, accounting for a whopping 95% of its sales. Considering it's still growing its loyalty program, it's reasonable to assume it will retain and grow its sales over time. In other words, it's holding on to its market share at the very least.
Third prediction: The cheap stock price will end up being a good thing
Assuming the cosmetics space is resilient and Ulta Beauty can hold on to its business without losing market share, investors are overreacting and not keeping a long-term perspective. Outside of the stock market crash during the pandemic, this is the cheapest the stock has been from a price-to-sales valuation in over 10 years.
ULTA PS Ratio data by YCharts.
This gives investors a chance to pick up Ulta Beauty stock at a good price. But not only that: The company has over $500 million in cash and equivalents, no debt, and a strong operating profit margin of almost 15%. This puts the company in a flexible position where it can be a buyer of its stock as well, boosting shareholder value.
Therefore, my biggest prediction here is that the stock market's overreaction will actually be a good thing for Ulta Beauty investors long term.
