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Friday, October 23, 2020

Best Buy Or Ulta Beauty: Which Retailer Has More Upside Potential?

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The temporary closure of retail stores during the coronavirus pandemic had a severe impact on the retail sector. However, a spike in e-commerce sales helped retailers to offset part of the loss of sales from the closure of physical stores. Many US retailers are recovering with the gradual reopening of stores since May. Meanwhile, investors will be keenly watching sales trends as the peak holiday season approaches.

Best Buy (BBY)

Thanks to remote working and shelter-at-home orders, Best Buy experienced strong sales in the second quarter of fiscal 2021 (ended Aug.1) for certain consumer electronics categories even as stores were open by appointment only for the first six weeks of the quarter and demand shifted to online channels.

The specialty retailer’s 2Q revenue grew 3.9% Y/Y to $9.91 billion with comparable sales (or comps) rising 5.8% and domestic online comps surging 242%. Adjusted EPS jumped 58.3% to $1.71. Merchandise categories that experienced strong growth included computing, appliances and tablets. But mobile phones and digital imaging sales declined.

Despite strong 2Q performance, investors were disappointed as the company cautioned that although it expects Y/Y growth in 3Q revenue, the 20% growth level seen in the first three of weeks of 3Q might not continue at this rate in the remainder of the quarter. In addition, the company indicated that looking ahead, its 2Q earnings growth rate might not be sustainable due to more labor hours in the physical stores, reinstatement of short-term incentive plans and higher advertising spend in 3Q.

Best Buy also pointed to uncertainty related to its performance in the second half of the year due to several factors, including the government’s stimulus actions, shift in personal spending from travel and dining out and the impact and duration of the pandemic.

Overall, Best Buy’s strong online business and its exposure to the in-demand consumer electronics categories helped the company weather the current crisis better than other retailers. However, higher costs to meet the demand for increased online sales are still a concern.

Ulta Beauty (ULTA)

The pandemic has hurt consumer spending on several non-essential categories. But, sales seem to be picking up with the reopening of stores since the easing of lockdown restrictions. Ulta Beauty’s comparable store sales were down 10% in July, improving from a 37% drop in early May. Sales trends continued to improve with comps down in the mid-single-digit range in the first three weeks of August.

Ulta Beauty’s sales for 2Q of fiscal 2020 (ended August 1) declined 26.3% to $1.23 billion with comps down 26.7% due to the impact of store closures at the beginning of the quarter. However, e-commerce comps spiked over 200% as customers used facilities like buy online, pickup in-store, and curbside pickup. The company posted an adjusted EPS of $0.73 in 2Q compared to $2.72 year-on-year.

Source- Yahoo Finance

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