Ulta Beauty shares fell by 15% on Wednesday, with CEO Dave Kimbell citing a decline in demand as the cause. At an investor conference hosted by JPMorgan Chase, Kimbell says the dip was expected after a successful holiday season and strong financial performance throughout 2023.
"We have seen a slowdown in the total category," says Kimbell. "We came into the year—and we talked about this on our [earnings] call a few weeks ago—expecting the category to moderate. It has [had], as I said, several years of strong growth. We did not anticipate it would continue at the rate that it's been growing."
Ulta wasn’t the only beauty company to take a hit: e.l.f. Beauty, Estée Lauder, and Coty stocks also dropped on Wednesday, demonstrating a marketwide decline.
While beauty has historically been incredibly resilient during periods of economic uncertainty, it’s clear that consumers are beginning to feel the financial strain. Kimbell cited increasing credit card debt, geopolitical tensions, and the upcoming presidential election as potential reasons for why consumers are hesitant to spend their dollar on beauty products. During the investor conference, Kimbell says he expects Ulta’s annual sales to rise by mid-single digits this year.
Despite anticipating this economic downturn, Kimbell conceded that it’s "a bit earlier and bit bigger than we thought." This sharp decline is noticeable across all price points and product categories, with prestige makeup and haircare experiencing the most pronounced impact.
Kimbell also mentioned the fierce competition between Ulta and Sephora and how Ulta is faring in the beauty retail arena. Ulta's in-store partnership with Target is a huge growth driver for the company. When the partnership was first announced in 2022, Target said it would add over 250 Ulta stores, with the goal of eventually having 800. The move came after Sephora inked an in-store partnership deal with Kohl’s in 2021 that added about 850 Sephora stores to its department store locations.
“What’s different [for Ulta] is scale and pace and how we cycle through that,” says Kimbell.
Sephora has been explicit in its efforts to gain market share by encroaching on Ulta's territory. “We’ve seen instances in which a Sephora opens up next door or within one or two miles from an Ulta location,” Kimbell added.
Sephora's aggressive tactics seem to be working: The French retailer had a historic year for sales and profits in 2023, which was driven by its partnership with Kohl's. The collaboration is expected to generate $2 billion in revenue by 2025.
While Sephora is the global leader in prestige beauty retail, Ulta wants to reach consumers across every income level. Kimbell says the company plans to attract these consumers by incorporating new products, improving the in-store experience, and changing its store layout.
Previously, Ulta stores were all laid out the same way, with prestige, more expensive products on the right side of the store and affordable products on the left. Now, Kimbell says the company will organize its stores so that prestige and affordable products are mixed together across the store, with higher-priced products on the top shelf and lower-priced items towards the bottom of the shelves.
The news of the stock market shift follows an earnings call last month during which Ulta announced a “better-than-expected fourth quarter financial performance.” Net sales increased 10.2% to $3.6 billion during the fourth fiscal quarter of 2023 up from $3.2 billion during the same period in 2022.
In a press release, Kimbell expressed a positive outlook for 2024, stating, “While we are mindful the near-term macro environment remains dynamic, we are optimistic about the resiliency of the beauty category, energized by the growth opportunities ahead of us, and confident in our ability to deliver for our guests and our shareholders.”
Ulta expects net sales to reach between $11.7 billion to $11.8 billion during the 2024 fiscal year. The company reported $11.2 billion in net sales for its 2023 fiscal year, up 9.8% from $10.2 billion the previous year.
The slowdown in the beauty category, as stated by Kimbell, aligns with the recent findings from McKinsey & Co. that indicate that consumers intend to reduce spending on makeup and skincare due to perceived high pricing in these categories. The consulting firm found that 30% of consumers surveyed reported buying fewer “bonus” beauty and personal care items this year to date, instead prioritizing purchasing more essential items. According to McKinsey, makeup and skincare exhibit the highest consumer intent to reduce spending among all merchandise categories, surpassing household goods, toys, pet food, vitamins, and fitness.
Ulta’s stock price settled at $439.98 on Wednesday, shortly after hitting a 52-week high of $574.76 just last month, just before the release of the retailer’s holiday quarter results. Over the past year, Ulta's shares have seen a decrease of -$85.48 (-16%). Other beauty companies have seen similar stock market declines: Estée Lauder Companies Inc. is down -$95.12 (-39.73%) over the past year, while Unilever saw a decrease of -$4.60 (-8.63%) in the same period.
