We appear to be entering another wave of management changes in the consumer sector, with news coming this week that longtime Estée Lauder CEO Fabrizio Freda was retiring. (This also follows the news a few weeks back that its CFO was retiring.) Estée has had a long period of underperformance versus its prestige and non-prestige competitors; however, with Estée brands having such a large presence in beauty retail, not to mention a large number of brand stores (MAC, Aveda, Bumble and Bumble), it could be argued that when a beauty giant isn’t punching at or above its weight class, it lessens the overall category dynamism and growth (i.e., it’s a negative for the department stores and beauty specialists like Ulta and Sephora).
At the start of the year, we said that the beauty category would begin to normalize following a terrific period coming out of the pandemic. Additionally, another reason for a more subdued year would be the lack of contribution from Estée. For Q2, revenue in the U.S. region was -5% with its most recent quarterly update release attributing the softness “to ongoing company-specific challenges, including its distribution mix, with declines in department stores which offset growth in other distribution channels, a strong competitive environment and the overall slowdown in growth in prestige beauty” (something we also covered looking at some of the other beauty retail names outside Ulta and Sephora).
From Ulta’s prior public comments, we also know that the industry is facing an imbalance in supply and demand with all the expansion at Sephora at Kohl’s, Ulta at Target, Amazon’s premium beauty shops, and off-price successfully increasing its beauty business. Looking at traffic, we to see the standalone Sephora locations also in decline for July and a steep stepdown at Kohl’s. That slowdown was in the second half of July and it’s what we wrote about for retail in general and with parent company LVMH’s results.
Looking at cross visitation by standalone Sephora customers, the large increase of cross-visitation to Kohl’s and off-price is dominant. We believe that the increase in cross-visitation with Kohl’s is due to the Sephora customer shopping the Kohl’s location out of convenience and the Kohl’s customer shopping the Sephora standalone to access its full assortment and services. (This is why LVMH is so confidently backing the full rollout of Sephora at Kohl’s.) The increase to cosmetic services providers such as European Wax Center and Massage Envy is interesting, and it suggest service opportunity for both Sephora and Ulta. The contraction in pharmacy speaks to that channel’s decline in relevance for the beauty customer. This was the opening that Sephora at Kohl’s and Target Ulta were seeking to exploit. Additionally, that decline and the soft traffic at mall-based department stores is what’s emboldening the parent companies (LVMH, Estée Lauder, and L’Oréal) to open more and more brands to Amazon (Clinique, Too Faced, Bumble and Bumble, Dr.Jart+, and Smashbox most recently from Estée).
