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Tomorrow, February 8th at 12:30pm ET we’ll be hosting a presentation to go deep on traffic statistics at ULTA stores next to where Kohl’s has added Sephora shops, versus those that have yet to be opened (but will in 2023). This new existential threat to ULTA has been core to our long term bearish thesis on ULTA. We’re seeing some surprising trends in our analysis of the data. As a reminder, Kohl’s is adding large Sephora shops (a brand owned by LVMH) into ALL of its stores, approximately 80% of which are in close proximity to ULTA locations. Sephora is also accelerating its growth to off mall locations – often in ULTA anchor tenant locations. Through its surge in unit growth over the past 10 years, ULTA has taken a page out of the KSS real estate playbook, which we think now will now lead to a heightened competitive environment as KSS aggressively rolls out these stores. We think that ULTA will aggressively defend its market share, at a time where it’s overearning on the gross margin line by ~400bps vs pre-pandemic levels. No doubt, 2023 was a banner year for all things beauty, and ULTA blew away the field with its financial performance. But with unit growth slowing dramatically, the ‘reopening’ impact of beauty having to be comped against in 2023 – not to mention the impact of new brands like Drunk Elephant, Fenty, and OLAPLEX -- Gross Margins likely to mean-revert, and SG&A pressure building (employees per store is down vs pre-pandemic and wage costs are rising). Ultimately, we think that nearly every key line of the P&L will lead to a sharp EBIT growth reversion in 2023. Yes, we were early, and wrong, in shorting ULTA. We need to remain #accountable to that call. That’s exactly why we’re going deep in the research on the traffic trends of these ‘Sephora vs Non-Sephora’ stores in tomorrow’s analysis.
We’ll additionally look at how new Kohl’s Sephora are performing relative to the “just Kohl’s store” to outline the potential traffic tailwind on the continued Sephora rollout.
We hope you’ll join us on our call.
