It’s been said that beauty is only skin-deep, but goes clean down to the bone.
Ulta Beauty (ULTA) got a hard lesson in ugly on Wednesday after the specialty beauty retailer’s top executive warned it was facing a slowdown in demand and stiff competition.
Shares of the Bolingbrook, Ill.-based company nosedived on the news and were down 14.5% to $444.39 at last check.
The bad news spread to other companies in the sector. Estée Lauder (EL) , Coty (COTY) , and e.l.f. Beauty (ELF) all saw their shares tumble.
“What we’ve seen so far is a slowdown in the total category across price points and segments,” Ulta Beauty CEO David Kimbell told J.P. Morgan analysts during a fireside chat, Reuters reported. “That’s a bit earlier and a bit bigger than we thought.”
After years of strong growth, the company now anticipates its total category to increase in a moderate mid-single-digit range.
“The competitive environment is intense, and we’re feeling it, particularly in a couple of areas. We lost share in prestige makeup. We’ve been challenged in haircare,” Kimbell said.
That competition is coming from several directions.
Beauty brand Ulta store.
Chicago Tribune/Getty Images
CEO cites ‘competitive intensity’
Walmart (WMT) added an exclusive line with Parisian beauty giant L’Oreal, its L’Oreal Paris Elvive Hyaluron + Plump hairline, focusing on a new trend popular on TikTok: scalp skincare and balance.
The retail giant has recently launched investments in several growing cosmetics and hair-care brands as part of its Walmart Start beauty-brand accelerator program.
The second-of-its-kind accelerator program allows creators and founders to network, find mentors, educate one another, and provide learning spaces for others.
Also, Amazon (AMZN) kicked off its Clinique storefront as a part of its push into the Amazon Premium Beauty store, which features big brands including Laniege, Innisfree, Sun Bum, Mario Badescu, Clarins, La Roche Posay, Elemis.
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Kimbell alluded to competitive pressures during the company’s fourth-quarter earnings call on March 14.
“Beauty is an attractive category, and competitive intensity continues to increase as channels blur and distribution expands,” he said.
Kimbell said in a statement that “while we are mindful the near-term macro environment remains dynamic, we are optimistic about the resiliency of the beauty category.”
During the call, Kimbell told analysts that the company was expanding into Mexico, saying that “the Mexican beauty market is sizable, growing, and has significant beauty opportunity.”
Ulta Beauty reported fourth-quarter earnings of $8.08 per share, up from $6.68 a year ago and beating the FactSet consensus of $7.53 per share. Sales totaled $3.55 billion, up from $3.23 billion a year ago, and topping FactSet’s call for $3.53 billion.
The company expects fiscal 2024 sales to range from $11.7 billion to $11.8 billion.
“The real kick in the pants came from expectations for comp sales of 4% to 5%, down from 5.7% for the past year, and for an operating margin of 14% to 14.3%, down from 15% for the past full year,” TheStreet Pro’s Stephen Guilfoyle wrote on March 15.
Guilfoyle said, “Performance has been consistently outstanding for this retailer that for so long seemed immune to the issues that other retailers often face.”
“Now, suddenly, Ulta Beauty seems very unsure of itself, and Wall Street is punishing that lack of confidence,” he said.
Analysts reaction to stock fall
Analysts weighed in on Ulta Beauty’s situation on Wednesday and suggested that Wall Street’s reaction was excessive.
“We believe the decline in shares reflects uncertainty rather than a more tangible understanding of earnings downside,” William Blair analyst Dylan Carden wrote in a note.
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Raymond James cut its price target for Ulta to $610 from the previous $630, while retaining an outperform rating on the stock.
The firm said the day’s decline in Ulta’s stock value was disproportionate.
Raymond James also reiterated its positive stance on other stocks within the beauty industry, maintaining its strong buy ratings for Estée Lauder and e.l.f. Beauty, as well as an outperform rating for Coty.
Despite the slower start to the year, Raymond James expects beauty to be one of the stronger sectors for consumer spending and believes the sector reaction is overdone.
Oppenheimer noted that Ulta Beauty’s downbeat commentary weighed “disproportionally” on both Ulta and e.l.f. Beauty, and to a lesser extent, Estee Lauder, the firm said
Oppenheimer has seen slightly more aggressive promotions lately at Ulta within its coupon tracker. The firm is surprised by the moderation in spending, and, at this point, is unclear whether this represents just a shorter-term blip.
Oppenheimer, which has an outperform rating on the company’s shares, no longer sees EPS upside potential at Ulta following the Amazon development.
In addition, the firm now does not expect investors to rush in to buy this dip amidst near-term category and competitive concerns.
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