Tech disruptors often capture market attention, but technology is being used to disrupt industries that may not be on the "techie" radar. Example: Cosmetics. Ulta Beauty(NASDAQ: ULTA) and e.l.f. Beauty(NYSE: ELF) are both cosmetics disruptors that are using technology, among other things, to distinguish themselves and capture market share. They're two of the biggest names in makeup today. Which one is the better buy?
The case for Ulta
Ulta and e.l.f. have different business models. Ulta is a retailer. Although it also has its own branded products, they're just one of hundreds of brands that Ulta carries in its chain of almost 1,400 retail stores and digital channels.
It broke out of the traditional beauty products mold when it first opened its doors because it carries a large range of brands at different prices. Most retailers sell either luxury brands or mass brands, and never the twain shall meet. If you want expensive, upscale cosmetics, you head to your closest department store, while if you don't want to overspend on mascara, you'll go to your local drugstore.
Ulta finally brought everything together under one roof and benefits from the love of the beauty enthusiast -- management understood that most beauty enthusiasts pick and choose from all of the above. Ulta operates this distinct model, earning loyalty and generating growing sales. It estimates that beauty enthusiasts account for 83% of total beauty sales in the U.S., and it benefits from this model with their patronage. Membership continues to increase, and members account for 95% of its sales.
It also offers beauty services, which increases loyalty and leads to even higher sales. Most customers who come in for a service also buy products.
Ulta has built up its name so that even though there are competitors now that borrow this model, it's the leader in this industry.
It's facing some pressure from customers switching down to lower-priced products as they are pinching pennies, but the loyalty remains, and they're still shopping at Ulta. In the long term, Ulta has expansion opportunities and should continue to grow comparable sales through its membership program and focus on digital.
The case for e.l.f.
e.l.f. makes makeup and skincare products targeted toward millennials and digitally savvy shoppers. It's connected to changing trends and uses an array of digital channels to sell its products and for marketing, including drops through TikTok and the first "immersive" beauty experience on the Roblox platform. It's one of the few companies that touts an increase in marketing spend, to 25% of sales, because this is helping it grow at even faster rates.
It's also a lot cheaper than the average beauty product, even compared to the other mass brands. e.l.f. has benefited from the inflationary environment as customers look for better buys, and growth has accelerated over the past few quarters. It's also increasing its overall market share, and it's just getting started in international sales, which increased 115% in the 2024 fiscal fourth quarter (ended March 31).
e.l.f. recently acquired skincare brand Naturium and is parenting with Ulta as a key sales channel. Although e.l.f. has 10.5% of the market for color cosmetics (according to Nielsen), it only has 1.5% of the market for skincare. Given its powerful marketing engine, this is a huge market opportunity that it has a good chance of capturing.
Some comparisons
e.l.f. is growing by leaps and bounds, but Ulta is efficient and profitable.
| Company | Q1 sales growth | Q1 EPS growth | Q1 operating margin | P/E Ratio |
|---|---|---|---|---|
| Ulta | 3.8% | (6)% | 14.8% | 15 |
| e.l.f. | 71% | (14)% | 5.3% | 77 |
Data source: Ulta and e.l.f. quarterly reports. P/E = price-to-earnings. Q1 = 2024 first quarter. Ulta's fiscal first quarter ends May 4. e.l.f. data is for its 2024 fiscal fourth quarter.
Each of these brands is demonstrating some resilience right now while feeling inflationary pressure. e.l.f. is still knocking it out of the park, which makes sense because its cheap prices can capture market share when people are switching down. Ulta, which has a range of prices, is feeling the heat more.
They both have strong long-term potential, though. I wouldn't pick a winner here -- I would recommend Ulta to investors looking for a value stock and e.l.f. to investors looking for a growth stock. Ulta looks like a real bargain at this price, and e.l.f. trades at a premium for its incredible growth and opportunities. You can buy both to balance a diversified portfolio, but you don't want to have too much exposure to the beauty industry, so I'd see which one better meets your needs today.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roblox, Ulta Beauty, and e.l.f. Beauty. The Motley Fool has a disclosure policy.
