Ulta faces challenges from Amazon, consumer loyalty

Piper Sandler has downgraded Ulta Beauty (ULTA) from Overweight to Neutral. Piper Sandler senior research analyst Korinne Wolfmeyer joins Market Domination to discuss her reasoning behind the call and how it is faring against other big names in the beauty industry.

Wolfmeyer points to Ulta's promotions as a "reaction to the competitive intensity we've seen over the past several months and even years, both from brick-and-mortar retail peers such as Sephora that's really ramped up its store count with its partnership with Kohl's (KSS), but also with online players like Amazon (AMZN) that's really ramped up its prestige beauty offering and seen a lot more brands feel comfortable selling on digital platforms like Amazon."

She notes that this competition has placed Ulta under pressure, and that "there's a lot less confidence in the margin opportunity going forward."

She adds that Amazon is a "threat to everybody," as it has a wide offering of products. Wolfmeyer explains that Ulta has a mass offering larger than Sephora, so it may be losing some share to Amazon. While Ulta's target demographic is broad-based, she argues that overall, customers are "diversifying where they're shopping, and they want to shop at all the different retailers. They don't want to stay loyal to just one."

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This post was written by Melanie Riehl

Video Transcript

All right, another retail stock we are watching closely, Ulta, the beauty retailer extending declines from yesterday.

That was after Piper Sandler downgraded the stock to neutral from overweight and joining us now is the analyst behind that very call Corine Wolfmeyer.

Piper Sandler, senior research analyst, Kin.

It is good to see you.

So you downgrade to neutral, you took the target to 404, Karina.

It looks like this really comes down to your analysis of the the just kind of the competitive and promotional state of the business kin.

Mhm.

Exactly.

It's, it's what we've seen with, with the promos.

They've really picked up.

They've become a lot more broad based and we do think it's a reaction to the competitive intensity we've seen over the past several months and even years, both from brick and mortar retail peers such as Sephora, that's really ramped up its store count with its partnership with Coles, but also with online players like Amazon, that's really ramped up its prestige beauty offering and seeing a lot more brands feel comfortable selling on digital platforms like Amazon.

It really is adding a bit of pressure to Ulta and what we what we fear now is now, investor expectations may be, you know, misaligned and uh there's a lot less confidence in the margin opportunity going forward.

And so we do think there is a lot of risk.

You're both from the top line and a margin perspective.

And now investors are confused and not sure, you know, what kind of valuation does this company deliver?

Given all of the these new pressure points that are, that are coming into play?

Kin, I'm curious when you look at Ulta versus those competitors that you mentioned, whether it's Sephora or Amazon or others?

Why is Ulta particularly vulnerable here?

Does it have to do with price?

Does it have to do with experience?

What do you think is going on there?

I do think Amazon's a threat to everybody and a as we put out earlier this week, the the product offering that Amazon has, it does have heavy overlap with both Ulta and Sephora.

Now for Ulta though, it, it also has a mass offering which, which Amazon does offer.

Um So the there's always that overlap there, Sephora doesn't have that mass offering that Ulta has but also at the same time, its main competitor, Sephora, it it may be losing some share to Amazon, but it's gaining share from Ulta because of this heavy store roll out.

Whereas Ulta is losing share to both.

It doesn't have that um protective share capture from anybody else.

Kin, who is the Ulta um customer, what's the, what's the demo here?

And how does that sort of compare and contrast to the competition?

The demographic?

I it's pretty broad based.

You, you have everywhere from Gen Alpha to baby boomers, you have demo, you have uh people in all income groups, whereas some of its competitors are a little bit more specific as to which age group or which income level they cater too.

So really Ulta is actually fairly well positioned um in, in terms of its customer base.

But what we're seeing now is customers across the board, no matter what age group, no matter what income level, they're diversifying where they're shopping and they wanna shop at all the different retailers.

They, they don't want to stay loyal to just one.