Why Ulta Beauty isn’t going down with the rest of brick and mortar

Cosmetics retailer Ulta Beauty (ULTA) is positioned to thrive past the pandemic thanks to its “strong competitive position,” says Morningstar analyst David Swartz.

“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,” wrote Swartz in a note to investors.

The company temporarily closed stores in March due to COVID-19 significantly impacting sales and earnings for its latest quarter, and it was forced to pivot to e-commerce and curb-side pickup during shelter in place measures.

The company started re-opening stores in May.

Unlike other brick-and-mortar businesses struggling to compete with online sellers, Ulta benefits from a unique trend: shoppers prefer to physically look at cosmetics, matching colors and shades in person.

“We believe teen girls and women like to sample products in Ulta’s stores and that its salons, selection, promotions, and service encourage frequent visitation,” wrote Swartz. “A recent survey by Teads found that two thirds of women prefer to buy beauty products in physical stores.”

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Fans gather at local Ulta Beauty in Houston to greet Kylie Jenner. The impromptu visit to promote the exclusive launch of Kylie Cosmetics sparked hundreds of excited attendees. at The Galleria on November 18, 2018 in Houston, Texas. (Rick Kern/Getty Images for Ulta Beauty)

A shopper walks through the updated cosmetic department at a Target store in San Antonio. Success of specialty chains like Sephora and Ulta has pushed discounters like Walmart and Target as well as drugstores like CVS to revamp their cosmetics areas with more open spaces, brighter lighting and more attractive fixtures. (AP Photo/Eric Gay)

Ulta also expects to negotiate lower rents in the future, a feasible outcome given uncertainties over demand for commercial real estate due to COVID-19 . Swartz predicts any money saved will be re-invested in digital capabilities.

“We forecast its e-commerce will grow at double-digit rates and reach 25% of sales in 2029,” wrote Swartz.

And while other retailers are closing stores, Swartz expects Ulta to open about 400 U.S. stores over the next decade while achieving same-store sales growth of about 5% (versus expected market growth of about 3%-4%.

“Ulta has reported same-store sales growth of at least 5% in every year since 2010,” Swartz observed.

With more than 1,250 stores and sales of $7.4 billion last year, Swartz expects the company to generate about about $8 billion in revenue in 2021, after a decline in 2020 due to COVID-19.

“We believe Ulta can attract new customers and increase its share of customers’ annual beauty spend by using customer data in promotion and merchandising and increasing its share of premium products,” wrote Swartz.

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Ines covers the U.S. stock market for Yahoo Finance. Follow her on Twitter at @ines_ferre

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