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Find the latest Barron's stories on MW for well-rounded coverage and more expert
financial advice you can trust.


BEAUTY RETAIL’S EARNINGS PAINT A PRETTY PICTURE—ESPECIALLY FOR ULTA

Published: Aug. 29, 2022 at 2:00 a.m. ET
By

TERESA RIVAS

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REFERENCED SYMBOLS


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ULTA
-0.28%
ELF
-0.31%
COTY
+0.80%
EL
-1.14%

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MANY INFLATION-WEARY CONSUMERS ARE PUTTING OFF DISCRETIONARY PURCHASES TO PAY
FOR ESSENTIALS.

Photo by Bruce Bennett/Getty Images

From home goods to electronics, many inflation-weary consumers are putting off
discretionary purchases to pay for essentials. Yet just like beauty, what’s
essential may be in the eye of the beholder—and makeup may fit the bill.

The beauty category’s resiliency is so well-known that it has its own moniker:
The “lipstick effect,” which can also refer to other types of small indulgences
that consumers find money for during a downturn. While we’re not officially in a
recession, this pattern already on full display: Shoppers may be replacing
cosmetics that expired during the pandemic, and they’re also more likely to
refresh their vanities with new products as social and professional events
resume.

Take Ulta Beauty (ticker: ULTA): On Thursday, the company posted great results
for its fiscal second quarter and released a strong full-year outlook which it
attributed to “strong consumer demand and broad-based momentum.” It’s not the
only good news, either. When Ulta posted first-quarter earnings results in late
May, the company said that cosmetics sales had finally returned above
pre-pandemic levels—and at a fast clip, climbing 12% from 2019.


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For most months this year, visits to Ulta stores have outpaced their 2021 and
2019 levels, according to data from analytics firm Placer.ai. In fact, foot
traffic was up 12.6% and 6.6% year over year in June and July, respectively.
In-person traffic was up 21.3% in June and 30.6% in July compared to 2019—a
particularly strong showing, given that this summer brought profit warnings from
big box stores who said inflation was curbing discretionary purchases

Ulta isn’t alone: e.l.f. Beauty (ELF) delivered a beat-and-raise quarter earlier
this month. Chief financial officer Mandy Fields told Barron’s that the
company’s budget-conscious consumers were still finding a way to keep up with
their skin care regimes they adopted during the pandemic—even as they returned
to wearing more makeup. Shares are up nearly 12% so far this year, putting
e.l.f. Beauty, the top-performer of the group, well ahead of the broader market.
E.l.f. stock has gained 39% since Barron’s recommended it last year.

Coty (COTY) on Thursday upped its full-year forecast, as it, too, has seen a
strong response from consumers. Both its prestige and mass beauty products saw
higher sales in the quarter, with the former leading the way with a 20% jump,
consistent with other higher-end retailers that have seen ongoing demand.

While Estee Lauder’s (EL) guidance is an outlier, the company’s most recent
downbeat forecast largely stem from international woes—such as ongoing travel in
China and the war Ukraine. As Barron’s noted when it highlighted the shares in
2020, the Estee Lauder typically hasn’t seen big dents in its business from
recessions. Likewise, Ulta’s performance during the Great Recession showed
consumers’ priorities. Ulta’s same-store sales dipped a to relatively modest
mid-single-digit level late in late 2008, Ulta’s worst quarter of that downturn,
compared to double-digit declines for other discretionary companies.

Something positive for beauty investors to consider? Survey work from analyst
firms such as Cowen & Co. and Jefferies have pointed to consumers’ continuing
intentions to spend on beauty products in recent months, even as they’re more
prone to cut back in other areas like dining out or apparel.

That’s good news for the industry as a whole, but Ulta still may look like the
best beauty option for investors: Ulta’s delivered a string of strong earnings,
but its shares are nearly flat so far this year, and change hands for less than
19 times forward earnings. That’s cheaper than its historical average of more
than 23 times—and makes Ulta a bargain compared to e.l.f., Estee Lauder, and
Coty. Meanwhile average analyst estimates for this year and next have been
moving higher, and Ulta’s expected long-term earnings growth stands at a hefty
36.6%.

That could earn investors a pretty penny.

Write to Teresa Rivas at teresa.rivas@barrons.com


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