Between disappointing quarterly results, lower guidance, and a few recent cuts, Ulta Beauty (NASDAQ: ULTA) This investment is not very interesting at the moment. The stock has fallen 33% from its February high to its lowest level in two years, precisely because the market has lost hope.
But as the old saying goes, it’s darkest before the dawn. Smart investors should view this sell-off as a buying opportunity rather than a warning, recognizing that this is still a great company. It just faces periodic headwinds. Alta may have weathered most of those headwinds.
Ulta Beauty Faces Expected Headwinds
If you’re not familiar with it, Ulta Beauty is a company that specializes in selling cosmetics, fragrances, and skin care. The company operates more than 1,250 brick-and-mortar stores that sell products at a variety of price points. Many of its stores are also salons that offer services like hair styling, waxing, facials, and makeup application.
It’s a competitive business for sure. Most of the big companies Retailers Some local salons also sell some of the same products, as do many local salons across the country. And competition is getting hotter. As CEO Dave Kimball noted during the company’s first-quarter earnings call in May, more than 1,000 new places to buy beauty products have opened in the past two years alone. Some of those places include naturally high-traffic locations, like Sephora stores inside multiple stores. Coles.
The economic downturn certainly doesn’t help matters. Even fast food chains that focus on nutritional value McDonald’s They had a hard time attracting people who were just looking for a low-cost meal last quarter — the same financial struggle faced by consumers they mentioned. PepsiCo When I announced my second quarter numbers recently.
The bottom line? Ulta Beauty’s total revenue growth slowed to just 3.5% in the three months ending in early May, with same store sales The company’s earnings rose just 1.6%. That’s with pricing that didn’t keep up with the company’s rising costs. Earnings per share fell from $6.88 to $6.47 during the quarter. Operating margins fell from 16.8% of revenue to 14.7%.
Alta believes this malaise may last a little longer. Its previous full-year sales forecast was $11.7 billion to $11.8 billion. The revised range is now $11.5 billion to $11.6 billion. Earnings expectations have also been cut from $26.20 to $27 a share to just $25.20 to $26 now. No wonder the stock is down 33% in just five months.
But perhaps the reason for this is that the market is obsessed with the past and not paying enough attention to the foreseeable future of this company. Investors who think about the future may want to go ahead and try to buy Ulta shares at their current discounted price.
Buy Ulta stock at this dip
Ulta Beauty stock could fall before it rises again. However, most of the bad news, past, present, and potential, has arguably already been baked into the stock price. So the risk of missing out on any upside from here outweighs the risk of further decline.
Perhaps the main reason to buy Ulta Beauty stock during this decline is simply that it does not reflect the unique strengths and competitive advantages that this company has.
Take, for example, its retail position. There are other brands that are similar in some ways. But no other company does what Ulta does as well as Ulta. That is, it offers a huge mix of value and luxury products, as well as a wide range of skin care, cosmetics, and fragrances. It’s a true one-stop-shop.
It’s also worth noting that while there are more than 1,250 Ulta Beaty stores in operation, the company operates an online store that complements — not competes with — its brick-and-mortar presence.
Moreover, the company understands the importance of repeat business, and has built a robust loyalty and rewards program to generate it. Ulta’s 44 million members (about two-thirds of the 70 million “beauty lovers” in the U.S. who make up the company’s target customers) account for 95 percent of the company’s sales. This audience may be cutting back a bit now, but they’re sure to be back in store—in droves—in the future.
That future may be closer than most investors expect, given the glimmer of hope on consumer spending. To put things in perspective, U.S. retail sales rose 2.3% year-over-year in June, beating expectations and continuing a long-running trend. The preliminary estimate of 2.8% GDP growth in the last quarter was much better than the final reading of just 1.4% in the first quarter, suggesting that the economy may be in better shape than recently feared.
By the same token, the recession that was supposed to follow the yield curve inversion in 2022 has not yet materialized. In fact, the yield curve is close to non-inversion, and there are no signs of a recession on the horizon. And perhaps there will be no recession after all.
Don’t panic about the present, focus on the future.
Well, Ulta Beauty may not be the first and only stock you want to own. While its value and competitiveness are undeniable, there are also potential risks it may face. Revenue growth is likely to slow this year, causing full-year earnings to shrink. That could certainly upset investors, if only temporarily.
But take a step back and look at the bigger picture. Even the analysts who recently downgraded the stock still generally favor it. They collectively expect sales growth as well as earnings growth in the coming year. In fact, the analyst community as a whole still says the stock is undervalued. The current consensus price target of $475.24? That’s 30% above the current share price. We have to assume they’re looking at the future through a calmer, more rational lens than most investors do at this point.
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James Bromley The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a position in and recommends Ulta Beauty. The Motley Fool has Disclosure Policy.
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