"Eolta Beauty Faces Performance Concerns Due to Store Closures Amid COVID-19"

Published 22 Mar.2020 15:05(KST)

[Asia Economy Reporter Eunmo Koo] An analysis has emerged suggesting concerns over Ulta Beauty's performance decline due to store closures caused by the novel coronavirus disease (COVID-19).

According to Hana Financial Investment on the 22nd, Ulta Beauty recorded sales of $2.31 billion in the fourth quarter of last year, a 9% increase compared to the same period the previous year. Same-store sales growth was also 4.0%, exceeding market expectations of 3.4%. Jongdae Park, a researcher at Hana Financial Investment, stated in a report on the day, "Despite a high base, store events held during the year-end shopping season succeeded, resulting in a 1.8% increase in traffic and a 2.2% rise in average transaction value." He also explained, "Gross profit margin rose by 10 basis points year-over-year due to improved MD margins, but operating profit remained at $290 million, a 2% increase, as the selling and administrative expense ratio rose by 90 basis points due to increased marketing and welfare expenses."

The number of new stores increased by 13, reaching a total of 1,254. Sales proportions by category were 48% cosmetics, 25% skincare and perfume, 18% hair care, and 4% salon services. The cosmetics share declined by 3 percentage points year-over-year due to a contraction in makeup. The number of 'Ultamate' members grew by 8% to 34.3 million, with the average annual purchase amount rising to $206.

High customer loyalty and an omnichannel approach contributed to strong performance during the year-end shopping season. Researcher Park said, "Despite continued weakness in the U.S. makeup market and a high base last year, Ulta Beauty maintained steady growth through its membership program 'Ultamate' and omnichannel strategy." He added, "The number of Diamond and Platinum members (annual purchase amounts of $500 and $1,200 or more) increased by 10% year-over-year, and the number of Ultamate Rewards credit cards rose by 40%, further expanding customer loyalty."

Additionally, to expand omnichannel services, pickup service was extended to all stores, and improvements were made to the logistics system and app, resulting in double-digit growth in e-commerce sales. The proportion of members using both online and offline channels expanded to 12%, and same-store sales growth remained solid even after the year-end shopping season. Researcher Park evaluated, "Despite the decline in the cosmetics category sales proportion, the strong performance of new brands such as Kylie Cosmetics and Kim Kardashian Beauty (KKW Beauty), as well as prestige brands like Clinique, is positive."

However, with the expanding impact of COVID-19, the high offline sales proportion is expected to be a burden, making a conservative approach advisable for the time being. Previously, Ulta Beauty provided guidance for this year projecting sales growth of 7-8%, same-store sales growth of 3-4%, operating profit margin decline of 70-80 basis points, and earnings per share (EPS) of $12.55 to $12.75.

Researcher Park explained, "From the 19th to the 31st, store closures and suspension of pickup services have led to the withdrawal of current guidance," adding, "Offline sales account for about 90%, which is absolute, and it is difficult to gauge the extent of consumption decline and performance due to the COVID-19 situation." He further noted, "Although the current stock price has a 12-month forward price-to-earnings ratio (PER) of about 12 times, providing some margin, a conservative approach is advisable for now due to reduced earnings visibility."