Shares of Ulta Beauty (ULTA) plunged after its CEO warned that demand for beauty products may be cooling. Loop Capital Markets Managing Director Anthony Chukumba says he was "a little surprised" by the announcement because the company just reported its fourth-quarter results on March 14. Chukumba also notes that the first quarter tends to be a tough one for Ulta, given the difficult comparisons to prior years' first quarter performance.
As to whether or not this is part of a larger consumer trend, Chukumba says it is still "too early to tell if this is just a little bit of an air pocket in terms of demand or if this is, kind of, the canary in the coal mine." He also dismisses the notion that beauty products are a discretionary item for all shoppers, explaining how, for many Ulta customers, there is an entire routine in their day built around several products.
Chukumba notes that Ulta has a number of competitive advantages, including its product mix, less intimidating stores, and a strong customer loyalty program.
Watch the video above to hear whether or not Chukumba thinks it's time to buy Ulta.
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.
JOSH LIPTON: The ugly day for Ulta Beauty shares dropping as the company cautions on first quarter comparable sales and sees a broad-based slowdown. Anthony Chukumba Loop Capital Markets Managing Director joining us right now.
Anthony, it's good to see you. So it was interesting, Anthony, I saw some of your colleagues on the Street in reaction to these headlines. At least some of them said they were kind of surprised by what they heard.
Investors were clearly surprised and disappointed. What did you make of, Anthony? Were you surprised?
ANTHONY CHUKUMBA: I was a little surprised. But the key word there is a "little," right? You know, look, the company reported fourth quarter results less than three weeks ago. And they gave their guidance less than three weeks ago.
And so to have them come out today and say that they're seeing this broad-based slowdown, it's a little surprising. The other thing to consider is that they do have their toughest comparison in the first quarter. So Comp store sales are up 9.3% in the first quarter of last year.
And they were actually up 18% in the first quarter two years ago. So that is the most difficult year-over-year. And two-year stack comparison, they're going to face all year. So maybe this shouldn't have been all that surprising.
JULIE HYMAN: Anthony, Julie here. It sounds like the commentary was also not just about Ulta, but in the category more broadly. Can you talk to us about what signs you're seeing there? Why we might be seeing some weakening in Beauty?
ANTHONY CHUKUMBA: Well, once again, I mean, they gave guidance like three weeks ago. So I don't think that anyone saw this coming. And that's why the stock is down as much as it is.
And I think it's really too early to tell if this is just a little bit of air pocket in terms of demand or if this is kind of the Canary in the coal mine. I just think it's too early to tell that either way.
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: 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 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 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.
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, as you say, it's confounding, I guess, this is happening. I can't help but think of what we heard from PVH the other day. Obviously, very different category.
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, look, I think that a lot of investors think of beauty products as being discretionary. 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 Ulta's target customer, what they call the beauty enthusiast, these products are just not that discretionary.
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. 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.
JULIE HYMAN: And, Anthony, just quickly here. I believe you've got a hold rating on Ulta, unless something has changed. And it sounds like from what you're saying, that's kind of where you are. You need more information on this thing before you would dive in. Is that true more broadly of beauty as well?
ANTHONY CHUKUMBA: So, I mean, full disclosure, we do have a hold rating. But we just downgraded the stock in mid-February. It looks like we were pretty prescient.
I mean, and quite frankly, we downgraded purely on valuation. We did not see this coming. So I don't want to make myself out like I'm some sort of Oracle.
Having said that, because of all these inherent advantages that Ulta has, given this violent, you know, pullback, it's certainly more attractive to me. Because the other thing that we, look, we didn't talk about is the fact that Ulta Beauty has a completely debt-free balance sheet. They generate a ton of free cash flow. They generate about $1 billion last year. I think they'll probably generate a similar amount this year.
They buy back stock very aggressively. And obviously, it's going to be even more accretive to earnings per share at a much lower level. And look, I think that, at some point, they may consider initiating a dividend, which I think would be a massive positive catalyst for the stock. Because suddenly, you're opening yourself up to income investors.
So there's a lot to like here. And this is definitely one where I'm going to be sharpening the pencil because this seems overdone to me.
JOSH LIPTON: Anthony, great to have you on the show today. Thanks so much for joining us.
ANTHONY CHUKUMBA: Happy to do it.
