Canaccord Genuity Analyst Susan Anderson joins Yahoo Finance Live to discuss the company's Buy rating for Ulta Beauty.

Video Transcript

SEANA SMITH: Ulta shares closing higher today as Canaccord Genuity initiates coverage on the stock with a buy rating, a "62 due" price-- $622 price target. Looking at shares closing up just about 2%.

Let's talk with the analyst behind that bullish call. We want to bring in Susan Anderson, Canaccord Genuity analyst. Susan, it's great to see you here. So you think Ulta still has a ways to go in this rally. Why are you bullish?

SUSAN ANDERSON: Yeah, so the beauty category itself we really haven't seen slow much. It definitely had some rebounds post COVID, but it's continued to be strong into this year. Credit-card data showing it actually picked up in February, and then that strength continued into March. So, you know, I think that's only going to benefit Ulta.

We also see them as a share gainer despite the higher growth category. We see them taking share from department stores, particularly as they roll out their prestige business further and then also add luxury such as Dior to their lineup of brands that they sell in the store.

Also the robust loyalty program that they have we think has benefited them. They're able to really connect with their consumer through that program and drive sales through it. So I think that's also been a differentiator.

And then finally their omnichannel capabilities. So they've been able to sell, you know, wherever the consumer wants to buy, and they really saw a robust online business during COVID, which has continued. It's just over 20% of their sales now, and we think that's beneficial to them as well.

So we continue to see them not only as being a share gainer in the space but also benefiting from the very strong beauty trends.

DAVE BRIGGS: Yeah, their COO just told Brian Sozzi 40.2 million in that loyalty program. Impressive. Susan, how significant is the partnership with Target in terms of driving future growth?

SUSAN ANDERSON: Yeah, so in 350 doors. They're rolling out to more. You know, I think it's been a great partnership for them, not only in terms of incremental sales-- while the contribution's still somewhat small, relatively speaking, I think in terms of just gaining new customers which then come into Ulta itself has been huge for them. I think it's really allowed them to expand their customer base.

SEANA SMITH: I know you've been tracking some credit-card data. When it comes to consumer spending on beauty, are you seeing any signs of weakness given the fact that there is so much uncertainty right now?

SUSAN ANDERSON: It's slowed, you know, from the high-double-digit rates we saw last year, which a lot of that was a COVID rebound. So we're not expecting it to continue to grow 15%, 18%, 20% in the prestige category this year, but we think it can still be easily strong high single digits if not low double digits. So there has been somewhat of a slowdown but still very strong versus what we saw pre-COVID. So I think that strength will continue through the year.

DAVE BRIGGS: 1,355 stores with plans to go between 1,500 and 1,700. Where are they opening those stores? Are those in malls, or are those standalone stores?

SUSAN ANDERSON: Well, I think Ulta's-- you know, one of their differentiators and really I think has benefited them has the fact that they've been mainly off mall, unlike Sephora which has also done really well, but they're, you know, more in malls. And I think also, you know, that's been an issue with the department stores too being in malls where we've just seen less traffic. Consumers want more convenience. They want to be able to pop in the store quickly, pick up what they need. They don't want to have to walk through, you know, a large department store and through the entire mall just to get to one store that they're looking for. So I think that's been a huge benefit to them as they've, you know, seen these share gains over the last several years.

SEANA SMITH: Susan, supply-chain issues, is that at all still a challenge here for the company? And also when we talk about inflation, how much have we seen some of these prices increase across the category?

SUSAN ANDERSON: Yeah, so, you know, we're definitely seeing supply-chain issues die down and inflation in certain areas. Transportation has come down quite a bit. Last year it was at historical highs. That's almost come back down to where it was. We've also seen commodity costs come down quite a bit.

The one thing that has remained sticky and still up there is labor. So that's still going to be a pressure point for them this year. But the other areas, you know, I think it could be a tailwind for their margins for this year.

DAVE BRIGGS: We don't primarily think of Ulta as a services category, but their COO just talked about that, again, with Brian Sozzi. How significant is that now and could it be down the road?

SUSAN ANDERSON: Yeah, so the salons in their stores, that's still a small part of their business. It takes up, I want to say, 10% of the square footage in the stores, but it's still single-digit percent of sales. So I think it's definitely a growth opportunity for them and a way for them to convert not only just services but product sales during those service visits. So I think it's definitely an opportunity for them to increase the sales there.

SEANA SMITH: Yeah, and, Susan, going back to what you started with here, one of the main reasons why you're bullish is given the fact that their loyalty program has become so popular. Just around 40 million members right now. Is there really significant upside just in terms of the growth trajectory of that number given the fact that it is so large?

SUSAN ANDERSON: Yeah, it's definitely one of the largest programs out there, particularly, you know, not including the mass retailers. Like Target has over a hundred million customers in their loyalty program. The next largest is probably Ulta. So it's definitely very large, but there's over a hundred million adult women in the US, so we think there's still opportunity for them to grow that loyalty program.

And then on top of that, you have the Gen Zers coming up to age, and they'll become part of that loyalty program. I think one of Ulta's key strengths is the fact that they cater so well to this younger consumer. And so I think as those younger consumers grow up, there's just more opportunity to add to that program.

SEANA SMITH: All right, Susan Anderson, thanks so much for joining us.