ULTA Ulta Beauty Inc

By Veronica Dagher 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 2, 2020).

The coronavirus pandemic is changing the face of the makeup business, but sales are expected to bounce back once there is a vaccine.

As more women work from home and wear masks when they go out, their desire for color cosmetics such as lipstick and blush has plummeted. It has accelerated two trends in the industry: a focus on skin care and "try-on" technology.

With no clear end date to coronavirus restrictions in sight, makeup sales are likely to remain depressed and will continue to weigh on the results of beauty companies.

Last week, Ulta Beauty Inc. reported that makeup sales, which accounts for about half of the retailer's revenue, are still below pre-pandemic levels. It declined to 43% of the retailer's sales in its fiscal second quarter, down 4 percentage points from last year. Despite weak makeup sales, the company posted better-than-expected profit, as consumers made fewer trips to the store but spent more when they shopped. Ulta said it earned 73 cents a share on sales of $1.2 billion, down 28% from a year ago.

Makeup sales were already softening for about the past two years partly because of some consumers' increasing preference for a more natural look. According to research firm Mintel, U.S. retail sales of color cosmetics are projected to be down 10.6% in 2020.

A lack of blockbuster makeup trends -- such as contouring, which helped boost industry sales about five years ago -- hasn't given consumers much to get excited about. Now, fewer social occasions, remote work and increased demands for women with children are further curbing interest in products.

In the past, women typically continued to buy small items such as lipstick during an economic downturn. That was even when they couldn't afford far more expensive luxuries such as vacations. In the industry, this is known as the "lipstick index." Masks appear to have shifted that behavior.

On its recent fiscal fourth-quarter earnings call, beauty giant Estée Lauder Cos. also pointed to weaker makeup sales. Estée's makeup sales fell 61%, because of the impact of Covid-19 on consumer preferences, the company reported.

Ulta's stock has been volatile. Shares sank to $128.52 on March 18 but rebounded to $252.08 on June 5. On Monday, Ulta shares closed down 2% to $232.18.

Estée Lauder shares sank to $144.38 on March 23 but the stock's rebound has generally been steady since mid-May. Shares closed Monday down 0.54% to $221.72.

For both stocks, and other beauty companies such as Coty Inc., skin care has been a bright spot. Some consumers have used having more time at home to develop skin-care regimens using face creams, lotions and serums.

"The lipstick index has been substituted by the moisturizer index," Fabrizio Freda, chief executive of Estée Lauder, said on the company's earnings call.

Burgeoning online sales have also been a growth driver for many beauty companies. Ulta said e-commerce sales soared more than 200% in its fiscal second quarter. The use of technology that enables consumers to virtually "try on" makeup or take makeup classes is also helping these companies stay engaged with consumers online.

Demand for makeup for the coming holiday season may be soft if social distancing curtails in-person parties and consumers' spending is reduced. In addition, a generally downbeat outlook for travel may continue to dampen makeup sales at airport duty-free stops for the rest of the year, some analysts say.

The hope is that much of this may abate once the pandemic ends. Certain shifts caused by the pandemic are likely to remain, however, especially if changes such as working from home are permanent.

Consumers' increased appetite for skin-care products is likely to still grow, says Erinn Murphy, managing director at Piper Sandler & Co. Curbside pick up, where customers buy items online and pick them up outside the store, is poised to continue, too.

Still, this sector relies on touch. So long as health and safety concerns persist, consumers may be less likely to try new brands and experiment with new products, analysts say. Without a vaccine, social occasions and fresh innovation, makeup sales are likely to stay depressed.

"The pandemic has given women permission to wear less makeup," said Stephanie Wissink, equity analyst at Jefferies.

Write to Veronica Dagher at veronica.dagher@wsj.com

(END) Dow Jones Newswires

September 02, 2020 02:47 ET (06:47 GMT)

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