Ulta Beauty Earnings: Competition Is Getting Ugly, but Valuation Becoming Alluring

Narrow-moat Ulta Beauty posted a rare same-store sales decline (down 1.2%) in 2024’s second quarter as a slowdown in prestige beauty demand and competition led to subpar in-store transactions. Shares fell 7% in Aug. 29 after-market trading. The primary source of competitive pressure has been the rapid expansion of Sephora stores within no-moat Kohl’s locations. Although Kohl’s reported an overall 5% same-store sales decline in its second quarter, its beauty sales were up 45% from the previous year. Even so, we believe the market will reset and that there is room for both Sephora and Ulta to be successful. We think the beauty category will continue to expand and that both specialty beauty retailers will take share from department and drug stores, as in the past.