Ulta Beauty (NASDAQ:ULTA): A Retail Stock Worth Watching

Finding the best retail businesses to invest in at this time is certainly challenging. With so many physical retail stores closing up shop thanks to the pandemic and the rise of e-commerce, investors need to be extra careful when it comes to adding shares. However, the current market conditions have revealed which stocks are quality just based on how they have performed this year in a challenging environment.

For example, Ulta Beauty (NASDAQ:ULTA) is a consumer cyclical stock that has held up fairly well during the pandemic. It’s one of the largest beauty retailers in the U.S. and is a stock worth watching for several compelling reasons. Let’s take a look at what sets Ulta Beauty apart in the retail space and determine whether or not it’s a buy at this time.

A Beautiful Business

Ulta Beauty is a member of the S&P 500 and operates over 1,200 retail stores across 50 states. The company specializes in beauty products, including things like cosmetics, fragrances, skincare products, hair care products, and salon services. Ulta has developed a loyal customer base with its Ultamate Rewards loyalty program in a highly fragmented market. What’s interesting about Ulta is its growth story. The company has posted double-digit annual sales gains every year since it began trading publicly back in 2007.

Two developments stand out as Ulta continues to expand. First, the company has made some intriguing investments in Artificial Intelligence that could help to increase customer loyalty over time. GlamLab is Ulta’s augmented reality application that allows users to see how different beauty products would look on them without physically visiting stores. The company also acquired an AI-based skincare beauty advisor that recommends certain products based on a series of questions.

Additionally, the company continues to grow its omnichannel capabilities. Ulta offers “Buy Online, Pickup in Store”, “Curbside”, and “Store 2 Door” options that are helping to grow Ulta’s e-commerce revenues and have helped to offset sales declines in the company’s physical locations during the pandemic. The bottom line here is that investors should be impressed with Ulta’s business strategy and prestigious reputation in the U.S. beauty supplies and salon services market which is valued at roughly $150 billion.

Pandemic Impacts

We know that the pandemic has negatively impacted sales for the vast majority of retailers out there, and Ulta is no exception. The company reported net sales of $1.2 billion in Q2 which was a year-over-year decline of 26.3%. Gross profit also took a hit in Q2 and decreased by 26.8%, which might be a big concern for investors. However, there are several reasons to believe that Ulta will come back strong in the coming years as the pandemic dies down.

Ulta is seeing large growth in its e-commerce sales and reported sales from e-commerce operations increased more than 200% in Q2. This confirms that the company is successfully growing its online presence, which will benefit Ulta greatly over time. Ulta also has plans to expand into Canada, which could happen sometime in mid-2021 and add to its growing beauty products empire. Finally, some tailwinds should help Ulta over the long term. Major competitors like Sephora and large department stores are permanently shutting their doors in droves, which means even greater market share for the fundamentally-sound Ulta when things get back to normal.

Deal with Target is Promising

Another great reason why Ulta is a stock worth watching is that the company recently announced that it has partnered up with discount retail giant Target (NYSE:TGT). The plan is to open Ulta mini-stores within Target stores across the country. The deal is very promising for Ulta, as it will create another sales channel for the company inside of one of the most popular brick-and-mortar retail stores in the United States.

The “Ulta Beauty at Target” stores will be roughly 1,000 square feet and house more than 40 makeup and skincare brands. With many of the malls that house Ulta’s stores seeing diminishing foot traffic, this move makes a lot of sense. The mini Ulta stores will be added to around 100 of Target’s stores starting in the second half of 2021. The news sent the stock up 7.4% during the trading session following the announcement, confirming a positive market perception of the new partnership.

Final Thoughts

Ulta’s growth story is very impressive and the company is seemingly making the right strategic moves to continue its expansion over time. With that said, there is a lot of uncertainty regarding how long the pandemic will impact retailers. Ulta is absolutely a stock worth watching, but investors might want to wait until the company reports better sales numbers that confirm a rebound before adding it to their portfolio.