Ulta stock downturn is simply 'normalizing,' analyst says

Ulta stock (ULTA) has been in a downward spiral after comments by the beauty retailer's CEO at a JPMorgan retail conference caught investors off guard.

Since April 2, shares have been off by more than 18% after CEO Dave Kimbell warned of "a slowdown in the total category across price points and segments."

Former LVMH chair Pauline Brown interpreted Kimbell's comments differently from nervous investors.

"I think it's just ... a bit of normalization," Brown told Yahoo Finance. "In general, in discretionary categories, luxury as well as more mass-market beauty, there's a normalizing.

"There was a bit of frothiness for a while," Brown continued, "and I think when he came out and said, 'We're seeing some slowdown,' he wasn't suggesting there's inflationary pressure or that there's a big hiccup in the consumer market. He was just suggesting that some of the things they've experienced coming right out of COVID and some of the hyped-up activity in beauty and other segments had cooled off."

At the time, Loop Capital Markets managing director Anthony Chukumba said he was "a little surprised" by the warning, especially since it came less than three weeks after the company issued its guidance for the year.

In March, the beauty giant reported fourth quarter results that topped analyst estimates; however, its 2024 earnings guidance came in lighter than expected. Still, Ulta's Kimbell noted on the earnings call that the company remained "optimistic about the resiliency of the beauty category" despite the "dynamic" macroeconomic environment.

"I think it's really too early to tell if this is just a little bit of air pocket in terms of demand or if this is kind of the canary in the coal mine," Chukumba told Yahoo Finance on April 3.

Mexico expansion 'a coup for Ulta'

Analysts noted that Ulta is lapping tough growth comparisons following a post-pandemic boom in the beauty industry.

"They have been coming from highs in the past few years, and they've been able to comp the costs, but they have very tough comparisons," Jane Hali & Associates senior research analyst Jessica Ramírez told Yahoo Finance. "[Kimbell] talked about still a conscious consumer and there being difficulty, which is true, and I think we're seeing that across the board. Now, I think it is still a cautious view."

In an effort to widen its consumer base and compete with cosmetic giants like LVMH-owned Sephora (LVMUY), Ulta has decided to push further into luxury beauty, becoming home to Chanel, Dior, Hourglass, and Fenty Beauty. The company also announced in March that it would be opening stores in Mexico through a joint venture with global operator Axo.

"That's definitely a market," Ramirez said. "Sephora is there, so [Ulta is] going after its competitor. They do have the beauty that it is entry-level, ... so I think that's still a positive for them."

The overall Latino base could be key for Ulta. According to Nielsen IQ's Hispanic Beauty Consumer Report, Hispanic/Latino consumers outspend their non-Hispanic/Latino counterparts in categories like hair care, cosmetics and nail care, facial skin care, and fragrances. And they're more likely to shop for these products at stores like Ulta, Sephora, Walmart, and Target.

Brown praised the international expansion, describing Mexico as a "culture and creative sector on fire."

"It's a very, very strong market right now," she said. "It's not evenly distributed, as you would expect in a less developed country. But there's a lot of momentum and a lot of excitement and a lot of kind of advancement going on. And see, even before that momentum I just described, it's always been a captive beauty market. And I do think as the Mexican consumer gets more sophisticated, they're not just one wanting to buy in their sort of local supermarket. So I think it's going to be a coup for Ulta."

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