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New concern about the beauty industry undeservedly knocks a portfolio stock. We’re buying the dip

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A customer walks down a skincare aisle at an Ulta Beauty Inc. store in New York, U.S., on Thursday, May 31, 2018. 

Gabby Jones | Bloomberg | Getty Images

We’re buying 30 shares of Procter & Gamble at roughly $156.41. Following Wednesday’s trade, Jim Cramer’s Charitable Trust will own 520 shares of PG, increasing its weighting to 2.52% from 2.38%.

Shares of Procter & Gamble were off more than 2% on Wednesday after Ulta‘s downbeat comments about the beauty market at the JPMorgan Retail Round Up conference. The beauty product retailer warned of a slowdown in the total beauty category across different price points and segments. This new outlook comes after several years of strong category growth, leading Ulta to guide first quarter comparable sales toward the lower end of guidance.

Ulta explained some of the category softness was blamed on a mixed economic picture and “societal factors” about the state of the consumer. In addition, management acknowledged increased competitive pressure from Sephora, which has a big partnership with Kohl’s.

The update caused Ulta shares to fall more than 14%, and the selling spread to other companies in the space like ELF Beauty, Club name Estee Lauder, Coty, and even Procter & Gamble.

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Procter & Gamble YTD

You may wonder why a household staple like P&G is getting caught up in this mix. Its Beauty segment is expected to make up about 23% of the company’s pre-tax income in fiscal year 2024 — and historically, it has been a strong source of growth. However, organic sales increased by only 1% last quarter after a temporary boycott in China of a Japanese skincare brand SK-II (owned by P&G) weighed down sales. Despite the beauty softness last quarter, Procter shares surged after earnings on the improving volume trends and ongoing improvement to profit margins.

Large advertisement of Japanese luxury skin care products brand, SK-II, in Causeway Bay, Hong Kong.

Miguel Candela | Lightrocket | Getty Images

We don’t think a quality stock like Procter & Gamble that sells a whole bunch of consumer products outside the beauty category should be down this much on Ulta’s woes. We question how much of the softness Ulta is seeing is due to increased points of competition versus a big change to the industry. We’re taking advantage of this weakness to upgrade our P&G rating back to 1 — buying buy back half the shares we trimmed around $159 in February. We’re following through on Jim Cramer’s P&G buy call from Wednesday’s Morning Meeting.

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Estee Lauder YTD

As for Estee Lauder, we understand why it’s down on this news, but it’s story is much different; it’s heavily tied to China and Asia Travel Retail, which is finishing up a nightmare of an inventory de-stock. We remain more mixed on Estee Lauder but hesitant to sell our position in case the inflection point in its business really is here, like CEO Fabrizio Freda explained on the company’s last earnings call and like Citi and Bank of America analysts see coming to fruition.

(Jim Cramer’s Charitable Trust is long PG, EL. See here for a full list of the stocks.)

As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade.

THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH OUR DISCLAIMER.  NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB.  NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.



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