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case-study_how-sell-side-gained-real-time-intelligence-into-ulta

How A Sell-Side Firm Gained Real-Time Intelligence into ULTA Beauty

ULTA Beauty is a chain of beauty stores spanning across the United States, offering both mass market and up-market makeup,…

ULTA Beauty is a chain of beauty stores spanning across the United States, offering both mass market and up-market makeup, skincare, hair and fragrance products. Trading on the NASDAQ with the stock code: ULTA, the stock has more than doubled since the market crash at the start of the COVID pandemic. 

The pandemic has been a keen factor causing the markets to be more volatile and generating incremental alpha can be challenging. To find those additional revenue-generating ideas, many financial institutions are looking outwards at alternative data for additional performance indicators. 

Ulta Beauty closes 19 stores and prepares entry to Canada - Premium Beauty  News
Image via Premium Beauty News

Overview

The client, John Zolidis, founder of boutique sell-side firm, Quo Vadis Capital, partnered with Chain of Demand to gain another lens into Ulta. He believed that the stock deserved a ‘sell’ rating based on several factors: 

  • Ongoing weakness in the makeup category (the company’s largest profit contributor) and facing year-over-year declines prior to COVID-19
  • Permanent shift to e-commerce which lowers EBIT margins
  • Continued pressure to invest in the business
  • Limited growth opportunities

With Ulta’s business primarily driven by makeup (49%) followed by skincare (24%), the client wanted to reaffirm his stance that the stock was a sell.

Analysis 

ulta-case-study_analysis-table
Once earnings were released on December 3
rd,  actual sales came in at $1.55B, where there was only a variance of 1.3%. Prior to the earnings announcement, the stock price was $289.53 at the close of the bell and opened at $280. 25, resulting in a 3.2% drop in the price. Ulta Beauty’s performance remained relatively weak in Q3 2020 following the impact of COVID-19 on the cosmetics and personal care business. Revenue missed consensus forecasts.On November 23, 2020, the client issued a sell rating on ULTA and used our multi-factor correlation model to gain insight on revenue performance.
Based on our backtested analysis, we predicted 3QFY20 revenues of $1.57B. 

Additionally, its fourth-quarter guidance predicts significantly worsening comps rather than improvement. On Dec 24. The Dow Jones Industrial Average (DJI) rose 114.32 points, 0.4%, to close at 30,129.83 and the S&P 500 rose 2.75 points, or 0.1%, to close at 3,690.01. The Nasdaq Composite Index closed at 12,771.11, declining 36.80 points, or 0.3%, but ULTA stock closed at a month low, losing –3.5% that day.   

Methodology 

Using data mining techniques and machine learning models, we systematically collected, compared, analyzed and summarized the performance of product data between the two e-commerce platforms Ulta and Amazon during September to November. We also focused on analyzing Ulta’s signature promotional event  the ‘21 Days of Beauty’, where customers could buy signature beauty products for 50% off. The processes during this period were aimed at understanding the outlook on the business and make observations for any potential inflection points 

21 Days of Beauty 2021 | Ulta Beauty 

After crawling data on Ulta and Amazon, we did a comparative analysis on product and assortment planning, focusing on category assortments, promotion, pricing and search interests. The fields collected included name, description, pricing and reviews. To uncover the findings requested from the client, we built a tailor-made data mining system and performed four distinct analyses:   

  1. Assortment analysis — We collected all skincare products and makeup products over a three month period to understand how the assortment shifted and which categories were growing and declining.
  2. Promotional analysis — We tracked different product categories offered during the ‘21 Days of Beauty’ campaign to understand which categories were discounted and how that affected the price sensitivty for like-for-like products on Amazon.
  3. Pricing analysis — We aggregated the average price for skincare products and makeup products and compared them to product prices on Amazon to understand if there were changes to Amazon’s pricing strategy during the ‘21 Days of Beauty’ promotion.
  4. Search trends – We tracked key search words centered around Ulta and the beauty industry to understand if there was any uptick or downtrend leading up to key promotional events.   

Takeaway 

We discovered that many of the data points aligned with the client’s observations about makeup being a shrinking category. 

  1. Assortment analysis — Skincare category is growing compared to makeup as a declining category
  2. Promotional analysis — Overall, more products were on promotion compared to 2020 with more makeup products on promotion compared to skincare products during signature 21 Days of Beauty campaign
  3. Pricing analysis — Skincare has an average higher price point compared to makeup
  4. Search trends — As a bi-annual event, the ‘21 Days of Beauty’ is a popular search term leading up to and during the event.  However, the term is a declining term, with less searches for the word during each event.

ulta-case-study_graph

“Chain of Demand created a custom data set and scraping mechanism to solve for the analysis we needed. After back testing and iterating the approach, COD’s work produced high-conviction real-time intelligence and a forecasting edge that we were able to integrate into our investment decision making process with great success.” 

— John Zolidis, President and Founder, Quo Vadis Capital 

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