As consumers return to cosmetics after a coronavirus-induced lull, Ulta (ULTA) has a slight advantage over other beauty retailers, one analyst argued.
"We view Ulta's ability to thrive in a very crowded marketplace as evidence of a competitive edge," Morningstar Equity Analyst David Swartz wrote in an Aug. 29 note. "While the firm faces intense competition and is affected by innovation and product cycles in cosmetics, we think it has developed a following that has allowed it to take share from mall-based stores while competing effectively against wide-moat Amazon and other e-commerce."
In particular, Swartz highlighted Ulta's advantage over its primary competitor, LVMH-owned Sephora (LVMUY). According to the analyst, Ulta has the upper hand when it comes to the retailers' mix of brands, rewards programs, and omnichannel strategies.
"I think Ulta does even better than Sephora because Ulta really focuses on a wide range of consumers, both people that like to buy the more expensive cosmetics and people that are looking for more discount stuff," Swartz told Yahoo Finance Live (video above). "Ulta really has a very strong loyalty program, I think very strong online sales, and so Ulta has really come back big this year."
Ulta's 'intangible asset'
Beauty retailers have seen strong demand for cosmetics as they come off a rough patch stemming from the COVID-19 pandemic.
In the second quarter, Ulta net sales increased 16.8% year over year due to broad-based momentum in cosmetics, skin care, fragrance, and hair care. The retailer also raised its full-year earnings and revenue guidance despite concerns that inflation could slow consumer discretionary spending.
"Makeup had been challenged during the pandemic because, of course, people were wearing masks and not going out so much," Swartz said. "So women have gone back to buying a lot of makeup, and Ulta's mix of prestige cosmetics and discount cosmetics really puts it in a great market position."
Swartz noted that Ulta, which was started as a discount beauty retailer, has added more than 150 brands since 2016, including high-end brands like Chanel, NARS, Kiehl's, and MAC. Ulta now offers Rihanna's Fenty Beauty brand as well, which initially launched online and exclusively through Sephora.
That provides a favorable impression to consumers and other brands.
"We think Ulta will continue to gain share in prestige beauty as vendors and consumers view it as a destination for prestige products," the analyst wrote. "Moreover, we think the company's association with premium brands contributes to its brand intangible asset."
Swartz also pointed out that Ulta's 'Ultamate Rewards' loyalty program is a "standout" compared to similar programs from Sephora and other beauty retailers.
In 2022, Ulta's rewards program had 38 million members, who accounted for 95% of sales and spent on average $200 a year. Swartz added that Ulta's loyalty program has also received a "boost" from its partnership with Target, which allows Target members to obtain Ulta rewards points when they shop at Ulta beauty sections in select Target locations.
The company says it also has seen significant uptake in its credit card program, which could be another advantage in the crowded beauty space.
"Ulta has also offered branded credit cards since 2016 and according to the company, quickly gained more than 2 million cardholders," Swartz said. "Sephora, in contrast, did not offer branded cards until 2019. We think Ultamate and the Ulta-branded credit cards provide customer data (used in merchandising and marketing efforts) and encourage store visitation."
Edwin is a producer for Yahoo Finance. You can follow him on Twitter @Edwin__Roman.