In the second quarter earnings call, CEO Dave Kimbell highlighted that the Beauty category is entering a normalization phase after an extended period of accelerated growth. Additionally, increased competitive pressure in Prestige Beauty, especially with the introduction of more than 1,000 new distribution points by competitors in recent years, has challenged Ulta’s market share in key segments such as makeup and hair care. Despite these headwinds, the company’s overall positioning remains strong, especially as it expands its store count and digital capabilities.
Should investors be concerned about declining sales?
Even though Ulta’s 0.9% net sales growth in the second quarter represents a noticeable slowdown compared to previous quarters, I still remain bullish on the stock. In fact, Ulta’s sales growth has recorded a consecutive slowdown in 13 of the past 14 quarters. However, I don’t find this delay to be overly worrying. According to data from Circana, the beauty industry grew by just 3% in the first half of 2024, while mass beauty barely made any progress. In this context, Ulta’s recent performance is relatively consistent with industry trends. It’s also crucial to remember that the company faces stiff competition in 2022 and 2023, with quarter-over-quarter growth rates ranging from 20% to 65%.
In the meantime, Ulta continued to execute on its expansion strategy, opening 17 new stores during the quarter (it also closed one, hence the 16 net) and ending the period with 1,411 stores. Coupled with strong digital sales and membership numbers, Ulta’s resilience in an evolving competitive landscape is quite evident. The company had 43.9 million active members at the end of the quarter, up 5% year-over-year, which should further support revenue performance in coming quarters.
Profitability remains robust despite margin pressure
Another important point to emphasize, despite the current decline in share prices, is that profitability remains a key factor for optimism. Although gross margin fell to 38.3% from 39.3% a year earlier, the company remains very profitable. The decrease was mainly due to lower margins on goods and higher fixed costs in the stores, including wage costs and benefits.
Still, despite this pressure, Ulta’s operating margin remained at a solid 12.9%. However, the company effectively demonstrated its ability to manage its cost structure, with its debt-free balance sheet providing additional support due to the absence of interest charges and the contribution of interest income.
Valuation and share buybacks signal a buying opportunity
In terms of valuation, I consider Ulta to be one of the cheapest specialty stores on the market. The company trades at a price-to-earnings ratio of 17.4 times this year’s expected earnings per share, with earnings growth expected to recover from next year. Given Ulta’s long track record of revenue and earnings growth, as well as its clean balance sheet and aggressive capital return profile, I find its current valuation ratio quite compelling.
Speaking of aggressive capital returns, Ulta repurchased $212.3 million worth of stock in the second quarter, bringing its total repurchases over the past four quarters to $962.7 million. The company has now retired nearly 27% of its outstanding shares over the past decade, with $1.6 billion remaining under its $2 billion buyback authorization.
Warren Buffett shows confidence in Ulta
Warren Buffett’s Berkshire Hathaway ($BRK.A)($BRK.B) invested about $266 million in Ulta Beauty last month (now valued at about $269 million), which can obviously be seen as a strong endorsement of the company’s long-term potential. . I think the investment from Buffett, known for identifying undervalued companies with solid fundamentals, shows confidence in Ulta’s ability to weather near-term challenges while validating the stock’s attractive valuation at its current price level.
Is ULTA Stock a Buy According to Analysts?
Looking at Wall Street’s view on the stock, Ulta Beauty maintains a Moderate Buy consensus rating based on 13 Buys, nine Holds, and two Sells in the last three months. At $404.83, ULTA’s average price target implies 4.22% upside potential.
If you’re not sure which analyst to trust when buying and selling ULTA stock, Christopher Horvers is the most accurate analyst covering the stock (over a one-year period). He has an average return of 16.64% per assessment and a success rate of 71%. Click on the image below for more information.
See more ULTA analyst ratings
Key takeaway
In conclusion, despite Ulta’s recent slowdown in sales growth and investor concerns about declining same-store sales, the company’s investment case remains compelling. Ulta continues to expand its retail footprint, maintains solid profitability and returns significant capital to shareholders through share repurchases.
With Ulta’s valuations looking quite attractive at current levels, a debt-free balance sheet, and Warren Buffett’s recent investments exuding confidence, I think Ulta is well-positioned for notable long-term returns.
Revelation
