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Is Ulta Beauty Stock a Buy, Sell or Hold at a 15.3X P/E Multiple?
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Ulta Beauty, Inc. (ULTA - Free Report) , a prominent player in the beauty space is trading at a discount compared to the Zacks Retail - Miscellaneous industry. With a forward 12-month Price/Earnings (P/E) ratio of 15.3X, ULTA is trading below the industry average of 16.8X and the broader Retail and Wholesale sector's 24X. It also trades lower than the S&P 500's multiple of 22.1X. However, investors should carefully evaluate whether this discounted valuation signifies a genuine buying opportunity or if it could be a potential value trap.
Image Source: Zacks Investment Research
We note that shares of ULTA have tumbled 7.4% in the past month against the industry’s growth of 0.8%. This decline in the stock price may have contributed to the company’s discounted trading status, raising concerns about its near-term performance. The recent drop in Ulta Beauty’s stock price can be linked to several factors, including competitive pressures, challenging macroeconomic conditions, and company-specific obstacles. Understanding these factors is essential for investors evaluating ULTA's current market position.
Image Source: Zacks Investment Research
What’s Holding Back Ulta Beauty’s Performance?
Ulta Beauty is facing challenging consumer dynamics, similar to other retailers such as Sally Beauty Holdings, Inc. (SBH - Free Report) , Kohl's Corporation (KSS - Free Report) and Macy's, Inc. (M - Free Report) . We note that ULTA is battling with shifting consumer behavior toward value-driven spending, coupled with rising competition from new beauty distribution channels, which is eroding its market share. The company's transition to a new Enterprise Resource Planning system has caused operational disruptions, and promotional efforts have failed to drive expected in-store sales. Another key issue is the slowing growth in the beauty category, with U.S. beauty sales increasing by just 3% in the first half of 2024. This normalization, after years of rapid gains, has hit ULTA hard.
Ulta Beauty is facing considerable challenges in its high-margin prestige beauty segment, which has historically been a key driver of profitability. Increased competition, with over 1,000 new prestige beauty distribution points opening in the last three years, has diluted Ulta Beauty's market share, particularly in key categories such as makeup and hair care. Consumer behavior is shifting toward value-driven spending, with many opting for mass-market beauty products over premium offerings due to underlying inflationary pressures.
More than 80% of Ulta Beauty’s store fleet has been affected by competitive openings in nearby locations, worsening the decline in in-store transactions. Despite efforts to introduce new brands and exclusive products, these external pressures are causing Ulta Beauty to lose share in the prestige beauty space, making it harder to maintain growth and profitability in this segment.
In the second quarter of fiscal 2024, the company’s gross margin declined to 38.3% from 39.3%. The downside was mainly caused by reduced merchandise margins and the deleveraging of store fixed costs. Management anticipates further pressure on gross margins for fiscal 2024, projecting a contraction of 70-90 basis points due to lower merchandise margins and higher fixed costs. In addition, the company is grappling with rising selling, general, and administrative expenses, which increased 7.3% year over year in the fiscal second quarter. This rise in costs is largely due to higher store payroll, corporate overhead from strategic investments, and increased marketing expenses.
Earnings Estimates for ULTA Take a Hit
Ulta Beauty’s full-year earnings estimates are going down, and a similar trend could be noticed in its upcoming quarterly projections. Over the past seven days, analysts have lowered their estimates for the fiscal third-quarter and fiscal 2024 by 0.7% and 0.5% to $4.48 per share and $23.10, respectively. These estimates suggest year-over-year declines of 11.6% and 11.3% from the fiscal third quarter and fiscal 2023 figures, respectively. This downward adjustment reflects a negative sentiment among analysts and suggests potential challenges in achieving growth.
Ulta Beauty's Strategic Pillars for Long-term Success
Ulta Beauty is steadfast in its commitment to strengthening its position within the beauty industry, unveiling an ambitious strategic plan. It is built around four key pillars designed to accelerate growth and deepen customer engagement. First, the company intends to curate a diverse selection of beauty and wellness products. Next, it aims to enhance customer experience by cultivating authentic connections with guests. The company further plans to expand its omnichannel presence, making it easier for customers to shop. Lastly, Ulta Beauty aims to strengthen customer loyalty by expanding its membership base and enhancing personalization, fostering long-term relationships with shoppers.
Although 2024 and 2025 are expected to be transitional years as the company navigates current category dynamics, Ulta Beauty anticipates significant opportunities to strengthen its leadership position in the long run. While the company has reiterated its financial guidance for fiscal 2024, it has set ambitious financial targets for the long term.
For fiscal 2024, Ulta Beauty expects net sales between $11.0 and $11.2 billion, with comparable sales growth ranging from a 2% decline to flat. It envisions an operating margin between 12.7% and 13.0% in fiscal 2024, wherein it expects earnings per share (EPS) to range from $22.60-$23.50.
However, looking at 2026 and beyond, Ulta Beauty aims to achieve annual net sales growth of 4% to 6%, mid-single-digit operating profit growth and low double-digit EPS growth. The operating margin is likely to be roughly 12% of net sales. Ulta Beauty will also continue its disciplined approach to capital allocation, prioritizing investments in operations and growth while returning excess cash to shareholders through share repurchases. It projects long-term capital expenditures of 4-5% of net sales. These targets reflect the company's confidence in its ability to navigate near-term industry dynamics while delivering sustained, profitable growth over time.
Should You Buy, Sell or Hold ULTA Stock?
While Ulta Beauty’s strategic framework sets the stage for long-term growth, the company’s near-term challenges, including shifting consumer behavior, rising competition and increasing expenses cannot be overlooked. Despite the stock trading at a discount relative to industry peers, this lower valuation may signal deeper issues rather than a potential buying opportunity. Given the near-term challenges, the recent stock price movement and a downward revision in earnings estimates, investors should approach ULTA stock with caution. At present, Ulta Beauty carries a Zacks Rank #5 (Strong Sell).
Image: Bigstock
Is Ulta Beauty Stock a Buy, Sell or Hold at a 15.3X P/E Multiple?
Ulta Beauty, Inc. (ULTA - Free Report) , a prominent player in the beauty space is trading at a discount compared to the Zacks Retail - Miscellaneous industry. With a forward 12-month Price/Earnings (P/E) ratio of 15.3X, ULTA is trading below the industry average of 16.8X and the broader Retail and Wholesale sector's 24X. It also trades lower than the S&P 500's multiple of 22.1X. However, investors should carefully evaluate whether this discounted valuation signifies a genuine buying opportunity or if it could be a potential value trap.
Image Source: Zacks Investment Research
We note that shares of ULTA have tumbled 7.4% in the past month against the industry’s growth of 0.8%. This decline in the stock price may have contributed to the company’s discounted trading status, raising concerns about its near-term performance. The recent drop in Ulta Beauty’s stock price can be linked to several factors, including competitive pressures, challenging macroeconomic conditions, and company-specific obstacles. Understanding these factors is essential for investors evaluating ULTA's current market position.
Image Source: Zacks Investment Research
What’s Holding Back Ulta Beauty’s Performance?
Ulta Beauty is facing challenging consumer dynamics, similar to other retailers such as Sally Beauty Holdings, Inc. (SBH - Free Report) , Kohl's Corporation (KSS - Free Report) and Macy's, Inc. (M - Free Report) . We note that ULTA is battling with shifting consumer behavior toward value-driven spending, coupled with rising competition from new beauty distribution channels, which is eroding its market share. The company's transition to a new Enterprise Resource Planning system has caused operational disruptions, and promotional efforts have failed to drive expected in-store sales. Another key issue is the slowing growth in the beauty category, with U.S. beauty sales increasing by just 3% in the first half of 2024. This normalization, after years of rapid gains, has hit ULTA hard.
Ulta Beauty is facing considerable challenges in its high-margin prestige beauty segment, which has historically been a key driver of profitability. Increased competition, with over 1,000 new prestige beauty distribution points opening in the last three years, has diluted Ulta Beauty's market share, particularly in key categories such as makeup and hair care. Consumer behavior is shifting toward value-driven spending, with many opting for mass-market beauty products over premium offerings due to underlying inflationary pressures.
More than 80% of Ulta Beauty’s store fleet has been affected by competitive openings in nearby locations, worsening the decline in in-store transactions. Despite efforts to introduce new brands and exclusive products, these external pressures are causing Ulta Beauty to lose share in the prestige beauty space, making it harder to maintain growth and profitability in this segment.
In the second quarter of fiscal 2024, the company’s gross margin declined to 38.3% from 39.3%. The downside was mainly caused by reduced merchandise margins and the deleveraging of store fixed costs. Management anticipates further pressure on gross margins for fiscal 2024, projecting a contraction of 70-90 basis points due to lower merchandise margins and higher fixed costs. In addition, the company is grappling with rising selling, general, and administrative expenses, which increased 7.3% year over year in the fiscal second quarter. This rise in costs is largely due to higher store payroll, corporate overhead from strategic investments, and increased marketing expenses.
Earnings Estimates for ULTA Take a Hit
Ulta Beauty’s full-year earnings estimates are going down, and a similar trend could be noticed in its upcoming quarterly projections. Over the past seven days, analysts have lowered their estimates for the fiscal third-quarter and fiscal 2024 by 0.7% and 0.5% to $4.48 per share and $23.10, respectively. These estimates suggest year-over-year declines of 11.6% and 11.3% from the fiscal third quarter and fiscal 2023 figures, respectively. This downward adjustment reflects a negative sentiment among analysts and suggests potential challenges in achieving growth.
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
Image Source: Zacks Investment Research
Ulta Beauty's Strategic Pillars for Long-term Success
Ulta Beauty is steadfast in its commitment to strengthening its position within the beauty industry, unveiling an ambitious strategic plan. It is built around four key pillars designed to accelerate growth and deepen customer engagement. First, the company intends to curate a diverse selection of beauty and wellness products. Next, it aims to enhance customer experience by cultivating authentic connections with guests. The company further plans to expand its omnichannel presence, making it easier for customers to shop. Lastly, Ulta Beauty aims to strengthen customer loyalty by expanding its membership base and enhancing personalization, fostering long-term relationships with shoppers.
Although 2024 and 2025 are expected to be transitional years as the company navigates current category dynamics, Ulta Beauty anticipates significant opportunities to strengthen its leadership position in the long run. While the company has reiterated its financial guidance for fiscal 2024, it has set ambitious financial targets for the long term.
For fiscal 2024, Ulta Beauty expects net sales between $11.0 and $11.2 billion, with comparable sales growth ranging from a 2% decline to flat. It envisions an operating margin between 12.7% and 13.0% in fiscal 2024, wherein it expects earnings per share (EPS) to range from $22.60-$23.50.
However, looking at 2026 and beyond, Ulta Beauty aims to achieve annual net sales growth of 4% to 6%, mid-single-digit operating profit growth and low double-digit EPS growth. The operating margin is likely to be roughly 12% of net sales. Ulta Beauty will also continue its disciplined approach to capital allocation, prioritizing investments in operations and growth while returning excess cash to shareholders through share repurchases. It projects long-term capital expenditures of 4-5% of net sales. These targets reflect the company's confidence in its ability to navigate near-term industry dynamics while delivering sustained, profitable growth over time.
Should You Buy, Sell or Hold ULTA Stock?
While Ulta Beauty’s strategic framework sets the stage for long-term growth, the company’s near-term challenges, including shifting consumer behavior, rising competition and increasing expenses cannot be overlooked. Despite the stock trading at a discount relative to industry peers, this lower valuation may signal deeper issues rather than a potential buying opportunity. Given the near-term challenges, the recent stock price movement and a downward revision in earnings estimates, investors should approach ULTA stock with caution. At present, Ulta Beauty carries a Zacks Rank #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.