Amazon Is Getting into the Beauty Business. What Does it Mean for Cosmetics Stocks?
“Amazon Professional Beauty Store.” Those four words sent shivers down the spine of anyone who owned beauty stocks, prompting a mass selloff in the two cosmetics companies most affected. Such is the power of Jeff Bezos these days.
On Monday, Amazon (AMZN) announced that it’s launching its own beauty store for licensed professionals, offering stylists, barbers and aestheticians beauty supplies typically found in salons and spas. That’s bad news for the companies that sell those products, as Amazon offers the convenience of shopping online, two-day delivery for Amazon Prime members and competitive prices.
Thus, it was no surprise that shares of Ulta Beauty (ULTA) and Sally Beauty (SBH) went tumbling on Monday and early Tuesday. ULTA fell 2.6% on Monday and was down again in early Tuesday trading; SBH, a small-cap stock, cratered 16.8% on Monday and fell another 3% in early Tuesday trading, crashing through 52-week support in the high 13s and settling at new lows in the high 11s.
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But there’s a big difference between these two beauty stocks.
Tale of Two Beauty Stocks
Ulta Beauty, a beauty product and salon services chain with more than a thousand stores and a market cap north of $20 billion, has been a very good stock. Even after this week’s Amazon-induced decline, ULTA shares are up 44% this year. The company is coming off a quarter of double-digit sales (+12.9%) and earnings (+21%) growth, numbers that are roughly in line with analyst estimates for its top- and bottom-line growth for the full fiscal year.
Amazon invading Ulta’s space is a blow. But not a death blow.
Sally Beauty, on the other hand, could be more vulnerable to the new competition. Though it has more than three times as many stores (roughly 3,700) as Ulta Beauty, those stores haven’t been producing very well of late. Sales have declined slightly in each of the last two years, and area expected to fall even further this year. Earnings, meanwhile, are expected to be flat this year.
As a result, Sally Beauty shares were already tumbling well before Monday’s Amazon announcement. Since peaking above 21 in November, SBH stock has fallen 45%, and it currently trades at its lowest point since 2010. It was an ugly stock entering the week; now it’s untouchable.
Chances are you don’t own any SBH shares (and if you do—sell now!). And if you own ULTA stock (which you may—it’s long been a favorite of our growth investing expert, Mike Cintolo), hold tight; it’s a company on much more solid footing, and one bad day for the stock doesn’t necessarily portend months of turbulence ahead.
As for Amazon, this is just one more newfound revenue stream—and one more industry it’s looking to conquer. Does that mean beauty product retailers are destined to suffer the same cruel fate as bookstores and department stores? We’ll see.
But it’s just more evidence that the retail landscape is shrinking as Amazon continues to consolidate more power. If you own Amazon stock (which barely budged on the news), you should probably hang onto it as the company’s universe expands. If you own traditional, brick-and-mortar retail stocks, you’re more vulnerable to Jeff Bezos’ whims.
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