Ulta shares decline after Jefferies downgrades due to increased competition
Jefferies analysts lowered their recommendation for Ulta Beauty (ULTA) from “Buy” to “Hold”. They justify this change with a more conservative expectation for the company’s sales growth; They expect this to be in the mid-single digit percentage range. They attribute this to increased competition, a less dynamic brand diversity, and stabilization in the overall product category.
Before the market opened, ULTA’s stock price was down 1.5%.
Analysts have observed that the growth rate in the high-end makeup industry has slowed from double-digit growth rates to a range between high single digits and low double digits. However, this growth rate is still considered strong for companies expanding their market share.
Sephora has achieved significant growth thanks to its innovative strategies and well-planned brand selection. L’Oréal reported a 9.4% increase in sales in the first quarter compared to the same period last year. In contrast, ULTA is losing market share in important and profitable sectors such as high-end cosmetics and hair care products.
Ulta’s range of high-end makeup products features well-established brands such as Clinique, Estée Lauder and MAC. These brands have been experiencing a decline in market share for several years.
Although Ulta Beauty has tried to diversify its product line, it has not had success with the addition of smaller, less established brands. On the other hand, Sephora has successfully acquired special and innovative brands that match current consumer trends. Additionally, it has been noted by analysts that many of the brands carried by ULTA have begun selling their products directly to discount retailers such as TJX Companies (TJX).
Analysts have noted that consumers prefer to shop at Sephora for the latest brand trends or at TJX for the same brands offered at Ulta Beauty for one-third the price.
Analysts had high hopes that new brands like Charlotte Tilbury and Sol de Janeiro would revitalize ULTA’s business. However, initial evaluations do not show a significant effect.
Jefferies also lowered its price target for ULTA’s stock to $438 from $585.