Jefferies analysts lowered their rating on Ulta Beauty (NASDAQ:ULTA) from Buy to Hold, citing “a more cautious view” of mid-single-digit comparable sales growth due to intensifying competition, maturing brand mix, “and a normalizing category.”
ULTA fell 1.5% in premarket trading.
The analysts note that growth in the prestige makeup category has slowed from double-digit percentages to high-single to low-double digits, though this pace still supports robust growth for those increasing market share.
Sephora is successfully driving strong growth through innovation and a strategic brand mix. Meanwhile, L'Oréal's like-for-like sales grew 9.4% in Q1. ULTA, on the other hand, has lost market share in critical high-margin categories such as prestige cosmetics and hair.
Another issue is that Ulta’s prestige makeup heavily features legacy brands such as Clinique, Estée Lauder, and MAC, which have been losing market share for years.
Despite diversification efforts, the company has unsuccessfully focused on smaller, unproven brands. In contrast, Sephora has effectively added exclusive, emerging brands capturing current trends. moreover, many of ULTA’s brands have started selling directly to off-price retailers like TJX Companies (NYSE:TJX), noted analysts.
“Consumers are shifting purchases to Sephora for the on-trend brands or TJX where they can buy the same brands at ULTA for 1/3 of the price,” analysts wrote.
“We were hopeful that Charlotte Tilbury and Sol de Janeiro would breathe life into ULTA's business, but initial checks don't show any major improvement,” they added.
Jefferies also cut its target price on the stock from $585 to $438.