A customer walks down a skin care aisle at an Ulta Beauty Inc. store in New York, U.S., Thursday, May 31, 2018.
Gabby Jones | Bloomberg | Getty Images
We buy 30 shares of Procter & Gamble at around $156.41. After Wednesday’s transaction, Jim Cramer’s Charitable Trust will own 520 shares of PG, increasing its weighting from 2.38% to 2.52%.
Procter & Gamble shares lost more than 2% Wednesday after UltaPessimistic comments from the beauty market at the JPMorgan Retail Round Up conference. The beauty retailer warned of a slowdown in the overall beauty category across different price points and segments. The new outlook comes after several years of strong category growth, leading Ulta to guide its first-quarter comparable sales toward the lower end of guidance.
Ulta said part of the category’s weakness was attributed to a mixed economic situation and “societal factors” related to the state of the consumer. Additionally, management recognized increased competitive pressure from Sephora, which has a major partnership with Kohl’s.
The update sent Ulta shares down more than 14% and the selling spread to other companies in the industry like Elf BeautyClub name Estee Lauder, Cotyand even Procter & Gamble.
You may be wondering why a commodity like P&G gets mixed up in this mix. Its Beauty segment is expected to account for around 23% of the company’s pre-tax profit in fiscal 2024 – and historically, it has been a strong source of growth. However, organic sales rose just 1% last quarter after a temporary boycott in China of Japanese skincare brand SK-II (owned by P&G) weighed on sales. Despite the beauty sector’s softness last quarter, Procter shares surged following earnings driven by improving volume trends and continued improvement in profit margins.
Large advertisement of Japanese luxury skin care brand, SK-II, in Causeway Bay, Hong Kong.
Miguel Candela | Light flare | Getty Images
We don’t think a quality stock like Procter & Gamble, which sells a whole bunch of consumer products outside of the beauty category, should be down this much because of Ulta’s woes. We wonder how much of the weakness Ulta saw is due to increasing points of competition rather than a major shift in the industry. We are taking advantage of this weakness to raise our P&G rating to 1, buying back half of the shares that we had reduced to around $159 in February. We’re following up on Jim Cramer’s P&G buy call at Wednesday’s morning meeting.
As for Estée Lauder, we understand why it is in bad shape, but its story is very different; it is strongly linked to Travel Retail in China and Asia, which is turning into a clearance nightmare. We remain more mixed on Estée Lauder but hesitant to sell our position in case the inflection point in its business is really here, as CEO Fabrizio Freda explained during the company’s last earnings conference call and as analysts at Citi and Bank of America see it coming to fruition.
(Jim Cramer’s Charitable Trust is long PG, EL. See here for a complete list of actions.)
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