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Ulta Beauty Stock: Is There More Downside?

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Ulta Beauty (ULTA) shares have fallen about 31% since it posted weak second-quarter earnings on August 29. The stock erased all of its gains. So far, the stock has fallen about 6% on a YTD (year-to-date) basis as of Monday.

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Ulta Beauty stock is under pressure

Low demand for cosmetics is taking a toll on Ulta Beauty’s financials and stock price. Currently, consumers prefer the “natural” look, which impacts cosmetic sales in North America. Skin and hair care products are still in demand, while the demand in the makeup category is waning.

Notably, Ulta Beauty generates nearly half of its revenues or about 47% from the cosmetics segment.

Soft cosmetics sales led Ulta Beauty’s management to lower its revenue growth guidance, which didn’t sit well with investors. Anticipating challenges in the cosmetics business, several analysts lowered their target price on Ulta Beauty stock.

Analysts’ recommendations

Multiple analysts cut their target price on Ulta Beauty stock due to near-term sales headwinds. Stifel reduced the target price to $215 from $250. Meanwhile, Cowen cut the target price to $300 from $313. Guggenheim cut the target price to $300 from $325.

Despite the target price reduction from several analysts, the consensus target price indicates a significant upside in the stock. Analysts have an average target price of $281.71 on Ulta Beauty stock, which implies an upside of about 22% based on its closing price of $231.21 on Monday.

Most of the analysts still have a favorable outlook on Ulta Beauty stock. Notably, 14 out of 27 analysts recommend a “buy,” 12 recommend a “hold,” and one recommends a “sell.”

We think that near-term sales headwinds will likely pressure Ulta Beauty stock. However, the company is gradually lowering its reliance on cosmetics, which should support sales. Recently, the sharp pullback in the stock reduced the risk.

Analysts’ consensus estimate indicates that Ulta Beauty’s sales growth rate could decelerate sequentially. However, analysts expect the sales to increase at a high-single-digit rate in the coming quarters.

Meanwhile, analysts expect the company’s bottom line to decline in the third quarter, which implies a steep sequential deceleration. Analysts expect Ulta Beauty’s bottom-line growth to accelerate in fiscal 2020.

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