Has Ulta Beauty Stock Bottomed Out?

  • Ulta Beauty stock has shed about $104 since its second-quarter earnings results.
  • The pain is easing for the stock, but near-term challenges could stall a sharp recovery.

Ulta has fallen since the second quarter

Ulta Beauty (ULTA) stock has lost about $104 (or 31%) since it posted weaker-than-expected second-quarter earnings on August 29. However, ULTA rose roughly 4% yesterday and closed at $233.85, indicating that its downside could be capped.

Ulta Beauty’s problems started with its second-quarter results. The company’s sales and earnings fell short of analysts’ estimates, which didn’t sit well with investors. Moreover, management lowered its full-year sales and EPS guidance, which further irked investors. Ulta Beauty stock closed about 30% lower on August 30 following its second-quarter results.

Ulta Beauty stock was down about 4.5% YTD (year-to-date) as of September 17. On the other hand, Estée Lauder (EL) stock was up 47.1% during the same timeframe.

Ulta Beauty stock: Pain eases

We believe the pain in Ulta Beauty stock has eased given its significant decline recently. The company’s relatively low valuation and ability to drive sales and earnings are expected to support its stock. However, we don’t expect a sharp recovery in the near term, as its growth rate is expected to decelerate.

Part of the problem has been the company’s high reliance on cosmetics—a business that’s seen stellar growth in the past. However, cosmetics demand is waning in North America, and skincare products are gaining steam. Skincare products form a smaller part of the company’s product portfolio.

On the other hand, rival Estée Lauder derives the majority of its revenue from the skincare segment. At the end of fiscal 2019, skincare products contributed 44% to the company’s overall revenue. As for Ulta Beauty, its skincare, bath, and fragrance category contributes about 22% to its total revenue.

Ulta Beauty is gradually reducing its dependence on the makeup category and emphasizing skincare products to offset the weakness in its cosmetics business. However, we believe persisting challenges in the cosmetics category could hurt the company’s sales in the short term and stall the pace of its recovery.

Five out of 23 analysts covering ULTA stock, including Citigroup and Morgan Stanley, downgraded it following its second-quarter results. However, the majority of analysts maintain “buy” ratings on the stock. Thirteen out of 23 analysts call it a “buy,” and ten call it a “hold.” Analysts’ consensus price target of $291.71 implies a potential upside of about 25% based on its closing price of $233.85 on September 17.

As of this writing, Market Realist analyst Amit Singh doesn’t hold a position in any of the securities mentioned above.