Dive Brief:
- Ulta Beauty’s net sales growth all but came to a standstill in Q2, with the metric edging up just 0.9% in the quarter, to $2.6 billion. Comps at the beauty retailer fell 1.2% as transactions declined and average tickets were roughly flat.
- The bottom line also suffered in Q2, with operating and net income both down by about 16%. Ulta cut its guidance for the second time this year as a result of the worse-than-expected performance, now projecting for sales to land between $11 billion and $11.2 billion, down from a prior outlook of between $11.5 billion and $11.6 billion.
- The high-end of its current guidance would be equivalent to flat revenues year over year, while the low-end would equate to about a 2% decline. Rather than comps firmly in the positive, Ulta now expects comps for the year to decline 2% or stay flat year over year.
Dive Insight:
It’s been a tougher year than usual for Ulta, which is generally a high performer in the retail space.
In May, the retailer cut its guidance for the first time this year, citing lost share in the prestige beauty market that seemed to allude to Sephora’s expanded presence at Kohl’s. Piper Sandler analysts downgraded the beauty retailer’s stock a few months later, due to heavy promotions and increased competition from Kohl’s and Amazon. And now the retailer is cutting its guidance again on the back of disappointing sales and comps.
“The main driver of the shortfall was intensifying competition in prestige beauty,” Piper Sandler analysts said in emailed comments Thursday. “As we observed throughout the quarter, incremental promos were put in place, but did not prove as effective. With limited visibility into the extent of the competitive impact and promos requiring more testing and learning, we think softer performance could persist into [fiscal year 2025].”
CEO Dave Kimbell again blamed the underperformance in part on the number of new points of distribution that have opened in the past few years, citing more than 1,000 new points of distribution in prestige beauty. (Sephora at Kohl’s had expanded to 1,050 stores as of Q2.) Kimbell said that more than 80% of Ulta’s stores have seen a competitor open nearby in recent years, while more than half of its stores have had more than one competitive location open in that timeframe.
Also impacting Ulta is a normalizing beauty market, which has seen surging growth in recent years, and a more cautious consumer, according to Kimbell. While prestige beauty continues to post impressive growth, with sales up 8% in the first half of this year, Ulta is losing share in that category. Mass, where Ulta is stronger, is growing much slower.
“Ulta’s numbers will spook the market as beauty has traditionally been a strong growth category that has proved itself more resilient to the consumer slowdown,” GlobalData Managing Director Neil Saunders said in emailed comments. “Ulta is also a pretty good operator that is not prone to major stumbles. As such, this sends a signal that consumers might be starting to pull back, at least at the margins, in response to economic pressures. As beauty is largely a volume category, even at the more premium end, it only takes modest cuts in the number of things people buy or selective trading down to cheaper options, to produce a decline.”
In response to the weak results, Ulta is taking actions to strengthen its assortment, improve social relevance, better use its loyalty program, enhance digital and evolve its promotions. So far, those efforts include an increased focus on exclusive brands, a doubling of its influencer network, better search and filtering capabilities, more members-only events and other efforts.
“While it will take time to shift the top-line trend, I remain extremely confident in our model and in our ability to execute and win in an increasingly competitive category,” Kimbell said.
The rough patch comes after years of strong sales, with the company topping $10 billion in revenue in 2022 thanks to 18% sales growth and following it up with a nearly 10% jump last year, to $11.2 billion. The retailer has also implemented a series of growth initiatives, including a planned expansion into Mexico next year, a growing wellness selection, an updated loyalty program, and an effort to lean into new brands and tech innovations.
