2 High-End Retail Stocks With Loyal Followings To Consider - InvestingChannel

2 High-End Retail Stocks With Loyal Followings To Consider

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2 High-End Retail Stocks With Loyal Followings To Consider

If we make what we said in yesterday’s Juice the rule of investing law, Lululemon (LULU) and Ulta Beauty (ULTA) don’t qualify as luxury retail. However, we can definitely classify LULU as high-end and ULTA as a store that carries quite a few high-end, if not luxury brands. 

While both stocks have taken a beating over the last month, one of the beauties of being a long-term investor is that near-term weakness on events such as earnings often present buying opportunities. If you really believe in a company’s long-term narrative, it might even make sense to step up your buying when shares get hit. 

And, as long-term investors, we have never had access to more or better data to help us assess the quality of a company’s long-term story. So let’s piece together part of the puzzle, beyond earnings, buy-and-hold investors should pay attention to when they consider retail stocks in particular. 

Loyalty Matters

Companies tend to build loyalty these days via their digital presence and, specifically, rewards programs. The Juice is on record as loving how fast food restaurants have embraced mobile apps and loyalty programs. Starbucks (SBUX) led the charge, perfected the art of digital and everybody else followed. For the record, over the last year our bullish bet on SBUX has paid off, with the company’s stock up roughly 28%. 

However, loyalty/reward apps don’t only matter in the food and beverage space. They can produce results in other areas of retail. ULTA and LULU provide solid case studies. 

  • ULTA’s loyalty program ended Q1/2023 with 41 million active members, up 9% year over year and 2% from Q4/2022. 
  • Diamond and Platinum members in ULTA’s loyalty program increased 30% annually. These consumers engage and spend more with the brand than standard loyalty members. 
  • In the first five months of LULU’s free Essentials loyalty program, the company signed up more than 9 million shoppers, surpassing internal expectations. 
  • Members of LULU’s paid tier – its Studio program – spend 9% more incrementally. 

The longer running success of ULTA’s program and early success at LULU appear to be key drivers of increased foot traffic at both stores. 

  • According to data from Placer.ai, 23.8% of ULTA Beauty shoppers visited the store twice during Q1/2023, up from 20.8% in Q1/2022. At Lululemon, 11.3% visited twice in Q1/2023 versus 10.7% in Q1/2022. 
  • More impressive for LULU is how it outperforms its peers. Visits to LULU in April 2023 increased 4.0% annually, while visits across the universe of apparel and luxury retail stores decreased 10.6% and 13.8%, respectively, over the same period. 
  • In April 2023, visits to ULTA increased 7.9% year over year. 

In a tough retail environment, repeat business matters. Both chains cultivate loyal customers not merely through rewards programs, but via other types of engagement. 

At ULTA, it’s being a one-stop shop for beauty needs. In addition to selling beauty products, ULTA offers a whole host of salon services. LULU’s aforementioned Studio tier in its loyalty program engages consumers with access to live and on-demand streaming workouts as well as in-store discounts and early access to events. 

Starbucks has captured Generation Z with its Instagrammable drinks. Being able to customize your order in literally hundreds of different ways appeals to this consumer. ULTA and LULU have essentially taken a page out of this book by giving their most loyal shoppers reasons to return beyond just dropping top dollar on quality merchandise. 

The Bottom Line: In high-end retail, it’s especially important to keep your best customers coming back. We’re not talking about $5 cups of coffee here. Rather LULU and ULTA deal in higher price points. Given this reality and the fact that they specialize, they have smaller pools of consumers to pull from. It makes just as much sense for LULU and ULTA to use loyalty programs to capture consumers on the high end and get them to visit multiple times per quarter as it does for Starbucks to lure in its most ardent fans every single day.

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