Beauty Retailer Lowered Full Year Outlook

Ulta Beauty has lowered its full-year outlook after missing Wall Street forecasts on the top and bottom lines in the second quarter.

The beauty retailer, in which Warren Buffett’s Berkshire Hathaway recently bought a new stake, is forecasting net sales for the fiscal year will land between $11 billion to $11.2 billion, down from its previous forecast of $11.5 billion to $11.6 billion. The outlook for annual diluted earnings per share was cut to between $22.60 to $23.50, down from the prior estimate of $25.20 to $26.

Ulta’s stock dropped around 7 percent in after market trading following the news, having closed up 0.2 percent to $367.58 earlier in the day.

Chief executive officer Dave Kimbell blamed the downgrade mainly on two factors: consumers are increasingly looking for value, while competition in the beauty space has intensified.

“Consumer behavior is starting to shift as consumers increasingly focus on value and become more cautious with their spending,” he said.

Kimbell also added that in addition to these external factors, Ulta experienced unanticipated operational disruption during the quarter resulting from the completion of enterprise resource planning transformation, including updating key store systems.

Net sales increased 0.9 percent year-over-year in the second quarter ended Aug. 3 to $2.6 billion, missing Wall Street forecasts of $2.61 billion. Comparable sales decreased 1.2 percent. 

Net income was $252.6 million compared to $300.1 million in the year-ago period. Diluted earnings per share was $5.30 compared to $6.02, lower than analysts’ estimate of $5.47, per Factset data.

“While we are encouraged by many positive indicators across our business, our second-quarter performance did not meet our expectations, driven primarily by a decline in comparable store sales,” Kimbell said.

During a post earnings call with analysts, he laid bare the competitive landscape, stating that the strength of the beauty category, combined with an attractive margin profile, has drawn substantial and diverse competition to the category.

“Today, there are significantly more places to buy beauty, especially prestige beauty, with more than 1,000 new points of distribution opened in the last three years. As a result, our market share continues to be challenged, particularly within prestige beauty,” he said.

In a recent note, Ashley Helgans, an analyst at Jefferies, stressed that the increase of prestige beauty brands heading to Amazon poses more of a risk to Ulta than LVMH-owned Sephora. Based on Jefferies’ estimates, Ulta’s prestige makeup business has a 16 percent brand overlap with Amazon’s premium beauty storefront, versus Sephora with 9 percent. 

At the same time, Sephora’s partnership with Kohl’s continues to pressure Ulta, despite it having its own partnership with Target.

“What is unique about the current environment is the scale and pace of change,” Kimbell continued. “More than 80 percent of our stores have been impacted by one or more competitive opening in recent years, with more than half impacted by multiple competitive openings. This significant portion of our store fleet is experiencing a prolonged sales impact.”

To reinforce its competitive position and drive stronger performance, Ulta is “aggressively” taking actions across five areas: assortment, social relevance, digital experience, loyalty program and promotional levers, the company said.

The latter, though, has failed to work its magic recently. In the second quarter, incremental promotions did not deliver the expected sales lift as the top line trends softened in late June and July, Kimbell explained. “We executed incremental promotions to drive revenue. These offers drove strong sales and traffic across our digital platforms, but did not deliver the expected incrementality in stores.”