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People are feeling the squeeze.
It’s causing consumers to cut back on grocery store visits — and look for cheaper alternatives to their favorite brands. They’re also dining out less, as well as taking shorter vacation trips… or just aren’t traveling at all.
But there’s one place where folks aren’t cutting back: Beauty supplies.
Hey, even in bad times, everyone still wants to look, smell, and feel good about themselves.
Leonard Lauder, the former chairman of Estee Lauder, once even claimed that cosmetic sales were inversely correlated to the economy’s health — meaning sales rose when the economy stalled.
Let’s call it the “affordable luxury” syndrome — with perfume, lipstick, and other beauty offerings as the beneficiaries.
Indeed, the global beauty market is projected to clock in at $579 billion this year — a potential year-over-year jump of 7.8%.
To find the biggest beneficiaries, we turned to our friends at Derby City Insights. Using proprietary data from LikeFolio, the Derby City team zeroed in on Ulta Beauty Inc. (ULTA), which figures to be one of the biggest beneficiaries.
From hair care to skincare to bath and body products to salon services, the Illinois-based Ulta is a one-stop shop for folks striving to look their best.
Ulta’s customers are more like fans — with Consumer Happiness levels up 11% year-over-year.
That data provided a “sneak peek” ahead of the company’s second-quarter earnings report last Thursday: When consumers are happy, they keep spending — or spend even more.
And that’s what Ulta shared:
- Net sales increased 10.1% to $2.5 billion.
- Comparable-store sales growth climbed 8%.
- And, best of all, it boosted its full-year net sales forecast from a range of $11 billion to $11.05 billion to an upgraded $11.05 billion and $11.15 billion.
Double-digit top-line growth?
Increased comparable-store sales?
Full-year forecast raised?
Rising stock price based on the earnings report?
That’s where we get a “No.”
Or, perhaps more accurately, “Not Yet.”
Ulta opened the trading day at $435.83 per share on the Thursday morning of the report and dipped 6.5% to $407.15 by market close Friday.
The share-price decline was attributed to a drop in the company’s gross-profit margin — one of the fundamental metrics analysts use to assess a company’s “economic health.”
That gross profit decreased to 39.3% compared to 40.4%, with “retail shrinkage” as the focus of the decrease in profitability.
Shrinkage is a decrease in inventory that isn’t because of sales, with one of the largest culprits being theft.
And it’s a problem that’s only expected to increase.
Stores lost an estimated $86.6 billion due to retail theft in 2022, with retail theft expected to surge 32% to $115 billion by 2025, according to a Capital One Shopping research report.
For Ulta, shrinkage is not a new issue.
Check out this headline from 2019:
Or this one from 2020:
Or this one from 2021:
You get the idea.
Theft isn’t anything new for Ulta, although this earnings season appears to be one in which mainstream news outlets are presenting it as a juicier narrative to chomp into than in previous years.
In a market dominated by uncertainty, investors tend to “accentuate” the negative instead of the many positives included in that quarterly report.
Which brings me back to my “not yet” comment.
Since this stock-price dip seems largely connected to theft concerns, and since that’s not a deep-and-fundamental issue with Ulta, it’s addressable.
And Ulta is doing exactly that.
The company is hiring more staff, more security — and professional security in some locations — putting products behind locked cabinets and working with the store-location landlords to establish a police presence in the parking lot.
In the meantime, the well-managed Ulta will continue to generate growth in sales and profits — results that investors will eventually circle back and focus on.
And the Derby City team called this temporary share-price stumble one heck of a “strategic entry point.”
Ulta’s Buy-the-Dip OpportunityA single tube of lipstick at rival beauty retailer Sephora might cost someone $27. But, at Ulta, they can grab that new shade for $15 on average.
And once that customer walks out the door, Ulta’s branded “Ultamate Rewards” program keeps them coming back.
It’s free to sign up for — and 40 million folks already have. The more you spend, the more you’re rewarded — collecting special discounts, free gifts, early access to new products and deals, free shipping, and more.
The Ultamate Rewards program works so well that a whopping 95% of Ulta’s sales are tied to the program, says Nicole Bernhardt, the exec who heads it up.
Ulta is also the top beauty choice for Gen-Z, according to Piper Sandler’s 2023 Teen Survey, with an impressive 63% of female respondents already being Ultamate Rewards members.
Thanks to the company’s products and this program, store trips are actual “events” — or even beauty “dates.”
And the data from Derby City Insights shows demand is through the roof.
Year-over-year, Purchase Intent mentions — folks talking about a product or service they bought or plan to buy — are up 48%.
Here’s why that’s interesting.
If you check out the chart above, you can see how Ulta’s share price has lagged the powerful uptick in Purchase Intent, making this a classic “divergent opportunity.”
Once the overreaction to the “theft narrative” dies down — and investors focus anew on Ulta’s sales and other strong fundamentals — the share price can start its climb closer to that green Purchase Intent mention line.
It did this before — back on October 20, 2022, when the stock price was $381.59. As Purchase Intent mentions kept climbing, the stock price kept pace, reaching $547.77 on April 27 — a 43% gain in roughly six months.
In a research note to clients, Canaccord Genuity analyst Susan Anderson said Ulta is a one-stop shop for all beauty needs and has loyal customers spending more than $500 each year at the beauty supplier.
She set a price target of $606 on ULTA — suggesting an upside of around 48% from where it’s trading right now.
Putting it all together…
The company’s budget-friendly offerings and innovative loyalty programs make it a compelling investment now for long-term gains.
But that’s not the only opportunity out there.
This is just one example of the edge the Derby City Insights team brings to their readers — their March 2020 “Coronavirus: Shopping List” report tipped subscribers of MegaTrends off to more than a few big winners: 192% on Zoom (ZM), 151% on Roku (ROKU), 107% on Peloton (PTON), 189% on Redfin (RDFN), 160% on Chewy (CHWY)…
And they currently have a dozen winners sitting in their portfolio — with new reports of moneymaking opportunities released each month.