Ulta: beauty products shine amid retail gloom

“My lipgloss is cool/My lip gloss be poppin’,” sang Lil Mama in her 2000s hit song “Lip Gloss”. The cosmetically themed tune also aptly sums up the state of US retail in late 2022.

Inflation-weary consumers are cutting back on discretionary spending to focus on essentials such as fuel and food. But they are still happy to splurge on small luxuries such as lipsticks. Despite weakening consumer confidence, sales of beauty products are booming. That has made specialist retailer Ulta Beauty one of the few winners in a sector marred by inventory pile-ups and profit warnings.

The stock is trading at a record high after climbing more than 13 per cent this year. It has outperformed both the S&P 500, down 15 per cent, and the S&P 500 retail index, down 27 per cent.

Ulta’s latest results underscore the company’s allure. Like-for-like sales jumped close to 15 per cent during the third quarter. That growth — impressive on its own — comes on top of a 26 per cent increase in the year-ago period. Margins grew and helped drive a 12 per cent rise in net income for the period.

Ulta is in something of a sweet spot. The return of large social gatherings is driving demand for beauty products. At the same time, consumers are trading down. Instead of splurging on a big-ticket item, they are treating themselves to $20 lipsticks.

It is not only make-up that is popular. Ulta saw strong sales growth in haircare, skincare and fragrances as well. More tellingly, customer spending went up across all income levels, with both mass and prestige products clocking double-digit sales growth.

Ulta’s winning streak can continue. The company has raised its full-year sales and earnings guidance. At about 21 times forward earnings, the company’s valuation remains reasonable. Walmart trades on 24 times. Beauty is in the eye of the investing beholder. Those who worry the shares have peaked should stick around.