The Ratings Game: Ulta is safe from Amazon but L’Oréal says U.S. beauty market is soft

Ulta has created a moat for itself versus Amazon and department store competitors, analysts say

Ulta Beauty Inc.’s problem isn’t Amazon.com Inc., but a softening U.S. beauty market, according to Oppenheimer analysts, who downgraded the stock to perform from outperform.

Analysts assigned Ulta a price target of $270.

While many retailers are feeling the pain of the “Amazon effect,” Ulta ULTA, +1.05% may face bigger problems at department stores, Oppenheimer said in a Monday note. Analysts based their downgrade on comments from L’Oréal S.A. OR, -0.54% which reported second-quarter earnings on Friday.

“The U.S. market has turned out to be difficult since January 2017, while Western Europe and the New Markets have accelerated,” said Christian Mulliez, L’Oreal’s chief financial officer, according to a FactSet transcript of the call.

See also: Four key sectors to watch closely this earnings season

L’Oreal’s analysis paired with department store discounting concern Oppenheimer.

“As a result, we now view the backdrop as more challenging for Ulta to deliver the same level of comp and earnings upside investors have grown accustomed to,” wrote analysts led by Rupesh Parikh.

Other analysts are more bullish about Ulta’s prospects, with Cowen & Company advising investors to “buy on the pullback.” Ulta shares are down 12.6% for the past month.

“[W]e believe department store promotional fears are overblown and are not new,” Cowen analysts led by Oliver Chen wrote in a Monday note.

Cowen also looked at the Amazon AMZN, -3.16% question in light of reports that the online juggernaut has signed a deal with high-end beauty company Violet Grey to sell brands like La Mer and Chanel on the site.

Read: Get ready for the less-profitable Amazon that you used to know

“Ulta’s loyalty, prestigious brand access, and mass offerings drive traffic and are competitive moats, enabling Ulta to protect and gain market share,” Cowen wrote. Analysts believe the company is positioned to “sustainably grow” earnings per share by 20% or more.

Cowen rates Ulta shares outperform with a $336 price target.

Instinet analysts say Ulta is already holding its own against Amazon, which sells about 34,000 or more L’Oréal and Estée Lauder Cos. EL, -0.01% products.

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“Yet, despite the vast offering, Ulta continues to comp, showing its ability to thrive alongside Amazon – i.e., there is plenty of department store share to go around,” wrote analysts led by Simeon Siegel.

Moreover, Instinet doesn’t think Violet Grey competes with Ulta.

“We believe Ulta and Violet Grey customer overlap is minimal and view fears as overdone,” analysts wrote.

In an analysis comparing the athletic and beauty markets, Instinet highlights cosmetic companies’ limited distribution, which has helped Ulta, and the beauty sector more broadly, create some distance with competitors.

“[S]pecialty beauty stores are thriving due to their experiential and discovery appeals, as well as their coveted license to sell otherwise limited prestige brands,” the note said.

Instinet rates Ulta shares buy with a $320 target price.

Ulta shares are down 1.5% for the year to date while the S&P 500 index SPX, -0.07% is up 10.3% for the period.

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