Shares of Ulta Beaty (ULTA) fell 15% on Wednesday after the company warned that demand appeared to be cooling. Loop Capital Markets Managing Director Anthony Chukumba told Yahoo Finance the announcement was “a little surprising” given that the beauty retailer released earnings just three weeks ago.
Chukumba recently downgraded Ulta’s shares to Hold, given the stock’s valuation. However, there are things that give the beauty retailer a leg up over rivals. Chukumba notes that Ulta carries both prestige and drugstore brands, giving it a diverse product mix. He also notes that some stores have spas and that, generally, their stores tend to be less intimidating than others. The most important advantage Ulta has is its loyalty program, Chukumba says, arguing it has “the most compelling” program.
Watch the video above to hear Chukumba explain why, for some customers, cosmetics are not a discretionary purchase.
Be sure to watch the full interview with Anthony Chukumba. For more expert insight and the latest market action, click here to watch this full episode of Market Domination
Editor’s note: This article was written by Stephanie Mikulich.
Video Transcript
JOSH LIPTON: And in this space, Anthony, I’m just curious, this name Ulta Beauty, what are their competitive advantages if you were to spell them out, Anthony?
ANTHONY CHUKUMBA: Oh, absolutely, they’ve got a ton of competitive advantages. So you know, look, Ulta Beauty, one of their big advantages is that they have both prestige brands, so the higher-end brands, think like a Mac or a Drunk Elephant, but then they have also those kind of mass brands, like the type of stuff that you’d find, like L’Oreal, you know, in a drugstore. The most sort of beauty products retailers have one or the other, they don’t have both.
Another thing is that they also have spas in their stores. And another thing is that their stores particularly relative to Sephora. I mean, they’re just not as intimidating, quite frankly, for the shopper. But one of the most important competitive advantages from my perspective is their customer loyalty program, Ulta Beauty rewards, used to be called Ultimate Rewards.
We actually just had ironically had a report out today in which we compared customer loyalty programs for all of our companies, covered companies that have them, and we thought that Ulta Beauty had the most compelling one. And it also becomes very important because one thing we found, at least in terms of prestige beauty products, and we’ve done work on this for a long time, pricing is strictly at manufacturer’s suggested retail prices. So in other words, the same price you’re going to pay at Ulta is what you’re going to pay at Neiman Marcus, at Nordstrom, at Macy’s, at Sephora.
So it’s sort of like, OK, if I’m going to pay the same price regardless of where I go, I’d rather go to somewhere where I can get both the prestige and the mass. That’s– you know, I can get my hair did if I decide I want to do that. And I get all these loyalty program points. And it’s just a pretty customer-friendly environment.
JULIE HYMAN: Yeah. So it’s– as you say, it’s confounding, I guess, that this is happening. I can’t help but think of what we heard from PVH the other day. Obviously, very different category, right? We’re talking about apparel and shoes, but they pointed out weakness in Europe. But that doesn’t help solve this conundrum, because Ulta doesn’t operate in Europe. So I guess, does this imply anything about what we’re seeing among American shoppers?
ANTHONY CHUKUMBA: It certainly might. And part of the reason that I think that is that– you know, look, I think that a lot of investors think of beauty products as being discretionary, right? In other words, gas prices are higher, inflation is higher, maybe I’m worried about losing my job, I’ll cut back. I mean, for that– for Ulta’s target customer, what they call the beauty enthusiast, these products are just not that discretionary, right?
I mean, you know, she wakes up in the morning. She takes a shower. She puts her face on there’s a whole sort of routine with a lot of different products involved. She gets done for the day. Maybe she’s got a date. Once again, there’s a whole routine. Before she even goes to bed, there’s a whole routine, right? And I think it’s the type of thing where you’re just not going to disrupt that unless you absolutely positively have to.
And so from that perspective, yeah, maybe this should scare us. Look, I’m loathe to draw too much or to read too much into it. I mean, it’s a very short period of time. I think we need to get more data before we make a larger call about the state of the US consumer.
