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Can Strong Skincare Business Help Ulta?

The pandemic put a halt to social gatherings. However, new vaccines and a growing number of vaccinated people around the globe are giving way to a recovery in socialization, office work, and personal interactions. This is leading to a demand for beauty products, which had taken a backseat.

Popular cosmetics and skincare retailer Ulta Beauty (ULTA) is benefiting from increased consumer spending on high-end beauty brands. I am bullish on the company’s prospects. (See Ulta stock charts on TipRanks)

Ulta’s Skincare business has been doing particularly well. Its brick-and-mortar channel is witnessing strong growth as consumers restart flocking into its stores.

Moreover, the company’s steps to bump online promotions, and increase customer engagement are providing an impetus to sales. Ulta is also focusing on expanding capacity at its fulfillment centers, and ship-from-store capabilities.

In the second quarter of fiscal 2021, the company’s net sales climbed 60.2% year over year to $1.97 billion.

The company’s prudent investments and other moves undertaken over the past year have helped it overcome market hurdles, reflecting its efficiency in operations and strong leadership. To take advantage of the growing trend of self-care, Ulta has increased the number of its wellness shops in certain stores, as well as on its website.

Additionally, Ulta’s Services business is gathering strong momentum, and the company plans to relaunch skin services in certain stores during the third quarter. Recovery in its loyalty program is also encouraging.

Management is optimizing its cost structure. Gross margin expanded from 26.8% in the fiscal second quarter of last year, to 40.6% in the last reported quarter, thanks to improved merchandise margins, fixed cost leverage on higher sales, favorable channel mix shifts, and reduced salon costs.

Another point for investors to note is the raised guidance for Fiscal Year 2021.

Ulta now expects net sales between $8.1 billion and $8.3 billion. An expected growth in operating margin is likely to be driven by higher gross margin, which is expected to be a result of fixed cost leverage and lower salon costs, among other things. Earnings expectations now lie between $14.5 and $14.7 per share.

On September 17, Loop Capital analyst Anthony Chukumba reiterated a Hold rating on Ulta, with a price target of $400.

The consensus rating for Ulta is a Moderate Buy, based on 13 Buys and eight Holds. The average Ulta price target of $445.19 indicates upside potential of 21.2%.

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Disclosure: At the time of publication, Chandrima Sanyal did not have a position in any of the securities mentioned in this article.

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