Amazon [AMZN] has added yet another vertical to its portfolio. On Monday the e-commerce company announced it would start selling professional products for beauticians, salons and barbershops in the US, sending share price in beauty suppliers Ulta [ULTA] and Sally Beauty [SBH] into freefall.
Following the news, Amazon’s share price saw a modest uplift of 0.6% to $1,913.90, while the value of beauty companies took a hit. Cosmetics retailer and supplier Ulta Beauty dropped to $346.54 by the end of the day, a 2.6% decline since Friday’s close. Meanwhile, Sally Beauty Holdings, a professional beauty supplies distributor, was on a downward trend all day, closing down 16.7% to $12.30.Amazon 1-year share price performance, CMC Markets, 27 June 2019
Amazon eyes the beauty market
Amazon's share price has been on a rollercoaster ride this month, losing 4.6% on the first trading day of June, before opening up over 9% by the following week, and rising 2% since. Over the past week, shares have behaved in a volatile manner, repeatedly spiking on market open and subsequently closing lower, and at Wednesday's close are down 0.69% since the start of the week.
Monday’s news represents Amazon’s latest play in the beauty sector – and an opportunity to tap into a growing segment of the market. The US hair salon industry alone has grown at an annualised 2.4% over the past five years, reaching $46bn in 2018, according to IBIS World.
At the same time, the industry remains fragmented, with salon owners and beauticians having to make inconvenient multi-stop resupply trips with little opportunity to compare prices, Amazon said in a blog post. The company’s new platform aims to provide salon professionals with wide-ranging stock and the convenience of doorstep delivery.
“We expect Amazon to quickly become an important enough channel for brands to carry their top offerings on the platform,” read a Jefferies research note on Monday.
“We expect Amazon to quickly become an important enough channel for brands to carry their top offerings on the platform” - An excerpt from Jefferies' research note
Ulta’s and Sally’s prospects
Among the “disrupted”, analysts say some names stand to lose more than others. UBS’s Michael Goldsmith noted that Ulta sells only around 30% of the 51 brands available on the Amazon Professional Beauty Store, which “highlights different merchandising strategies and the lower quality brands on Amazon”. Ulta also has a strong B2C offering and has been quick to bring lines from YouTube influencers and celebrities such as James Charles and Kylie Jenner in store to boost sales, which provides further protection from Amazon’s latest move.
The perceived risk is more pronounced in the case of Sally, which targets professional and salon customers. DA Davidson analyst Linda Weiser wrote that Amazon’s platform poses a direct threat to 19% of Sally’s operating profits, while another 33% will come under pressure from the extra competition. As a result, she lowered Sally’s share price target from $16.50 to $14 on Tuesday.
The proportion of Sally's operating profits threatened by Amazon competition
The divergence between the two companies is even more obvious when comparing their recent financial results. Following expectation-beating results in March, and with solid full-year guidance, Ulta has risen 39% in the year to date. Sally, on the other hand, managed to gain 12.4% between January and April, topping out at $19.44, before it reported an earnings miss in Q2, which sent the stock on a downward slope.
Ulta’s P/E ratio currently sits at 30.13, while Sally’s lags behind at 6.24 – and well behind the Refinitiv industry average of over 34.61. Refinitiv analyst consensus shows that the majority of analysts recommend Ulta as a buy, while Sally holds five hold recommendations, three underperform and one sell.
Amazon’s B2B revenue engine
While the addition of its professional beauty arm is unlikely to push Amazon beyond the $1tn market-cap mark (although it’s share price is not currently far off – last August’s all-time high of $2,050 is just a 7.1% increase away), the ecommerce company’s B2B plays are becoming an increasingly important revenue driver.
|PE ratio (TTM)||79.23|
|Quarterly Earnings Growth (YoY)||118.60%|
Amazon share price vitals, Yahoo finance, 27 June 2019
Since Amazon Business launched in 2015, the company’s B2B platform has evolved from a convenient online office supply store to providing equipment for all sorts of sectors, including specialist chemicals and medical supplies. The Amazon Business platform, which replicates the third-party seller model that’s made the company’s success in retail, racked up a million users within a year and has gone on to significantly increase customer numbers since then, according to a March note by Bank of America analyst Justin Post.
“B2B has many more hurdles to adoption given the complex (and often offline) procurement processes, but Amazon is driving steady adoption,” Post wrote. Gross sales in B2B, he estimated, rose from $1bn in 2016 to $10bn last year, and could reach $33.7bn by 2023.