2024 wasn't a great year for Ulta Beauty (ULTA 0.79%). It ended the year with Warren Buffett selling a large chunk of his recently initiated position in the stock and a continuation of the pressure it's been experiencing the whole year. Ulta stock fell 11% in a year when the S&P 500 gained 25%.
If that wasn't enough, it's also starting 2025 with some major news. Last week, the company announced the departure of CEO Dave Kimbell. President and COO Kecia Steelman is now in the leading role. The market wasn't enthused by the announcement, and Ulta stock is down 7% since Jan. 1.
Is 2025 going to be another downer for this beauty industry giant? Let's see what Steelman brings to the table and whether or not Ulta is on track for better times or more trouble ahead.
A weakened beauty consumer
Ulta stands out on the beauty scene in a number of critical ways, and its vision of what a beauty retailer should look like has drawn millions of fans. Most importantly, you can buy any type of beauty product at Ulta's huge stores. Early on, it recognized that while the occasional cosmetic buyer might lean toward drugstore or luxury products, the beauty enthusiast doesn't stick to high end or low end; they'll buy both. Ulta's stores combine cheaper brands with luxury brands, offering a range of everything the beauty enthusiast would purchase. Beauty enthusiasts account for the vast majority of beauty product sales, and Ulta has skyrocketed to the top of the beauty store chain.
Another way it differentiates itself and generates more sales is by offering services, another innovation that wasn't happening in previous iterations of the beauty store concept. Ulta's stores are a one-stop shop for products and services, where customers can get everything they need. Its data shows that customers who come in for a service typically also end up buying products, creating a positive sales cycle.
In general, this model works very well, and Ulta has increased its revenue at a compound annual growth rate (CAGR) of 15% over the past 10 years. Earnings per share (EPS) have increased at a CAGR of 24% over the same time.
Today, that model means that the same beauty enthusiast will shop at Ulta, but they'll switch to cheaper brands and spend less. Not only does that mean lower sales growth overall, but selling more lower-priced products also squeezes its margins. Ulta's operating margin has been narrowing, and it's not expecting it to spring much higher in the near future.
ULTA Operating Margin (TTM) data by YCharts
Management says that there's increasing competition in the luxury beauty space, which could hamper its near-term ambitions as well as its margins.
Can a new CEO bring a fresh perspective?
When a struggling company announces a new CEO, the market usually responds positively. However, this news didn't go over well with the market, possibly because it implies there may be more trouble than the market realized. Ulta got a positive market reaction when it raised guidance in its fiscal 2024 third-quarter report back in December, and investors might be wondering why the CEO is leaving abruptly.
Steelman is also an insider, having been with the company in various executive roles for the past 10 years. The market may have preferred someone completely new who can bring a new eye to the company's troubles. Will this new CEO just be more of the same?
I don't think so. A fresh pair of eyes is just that, and Steelman has the consumer background and retail experience along with being a different voice.
What to expect in 2025
Management already announced that it's going to open 200 new stores by 2027, bringing its total to more than 1,600, with longer-term goals of 1,800 stores. It announced a dramatic new strategy to enhance its omnichannel options and create a more curated consumer experience.
The Ulta store experience could change dramatically under new direction. It already encompasses the services piece that brings it up a notch as compared with traditional retail, but it has said it would pivot toward wellness, and that could change its store model to include a heavier focus on experiences. Services in general are a higher-margin business than physical products, and that's a top-level change that could trickle down to robust practical improvements on the bottom line.
However, with no change to the model, 2025 could still be much better than last year. Moderating inflation should lead to healthier consumer spending and a return to buying more expensive products.
Ulta stock is trading at the cheap P/E ratio of 16, and it looks like a long-term winner that could rebound in 2025.
