Shares of Ulta Beauty (NASDAQ:ULTA) have outpaced the broader markets by a wide margin since the company went public in October 2007. In the last 16 years, Ulta stock has returned almost 1,407% to shareholders, compared to the S&P 500’s (SPX) gains of 314%.
But past returns shouldn’t matter much to current and potential investors. You need to evaluate if the company can continue to generate market-beating returns in the future. In this context, my bullishness on Ulta Beauty stock is fueled by its steady top- and bottom-line growth, combined with its stellar outlook for the next quarter.
An Overview of Ulta Beauty
Valued at $23.4 billion by market cap, Ulta Beauty operates specialty retail stores selling products ranging from cosmetics to haircare and skincare in the U.S. It is the largest specialty beauty retailer in the U.S., with an assortment of over 25,000 products across price points and categories.
With more than 1,350 stores located primarily in high-traffic locations, Ulta Beauty has increased sales at a consistent pace over the past decade via a combination of organic growth, expanding omnichannel capabilities, and opening new stores.
Moreover, its loyalty program allows members to earn points for every purchase, resulting in repeat sales and high customer engagement rates.
How Did Ulta Beauty Perform in Q3 2023?
In Fiscal Q3 2024 (ended in October), Ulta Beauty increased its sales by 6.4% year over year to $2.5 billion. While the company opened 12 net new stores in Q3, its same-store sales were up 4.5% year-over-year.
A challenging macro environment and elevated inflation levels, however, meant the retail giant’s profit margins narrowed in the October quarter. It ended Q3 with a gross margin of 39.9%, down from 41.2% in the year-ago period. Comparatively, its operating margins narrowed by more than 200 basis points to 13.1%.
Ulta Beauty attributed its falling profitability to a variety of factors, including lower merchandise margin, higher supply-chain costs, higher store expenses, strategic investments, and higher marketing expenses, among others.
Despite slower consumer spending and a rising cost environment, Ulta Beauty has managed to beat Wall Street consensus earnings estimates in each of the last four quarters, showcasing the resiliency of its business model and cash flows.
What Next for Ulta Beauty?
While it has delivered outsized gains in the past decade, ULTA stock currently trades 12.6% below all-time highs, creating a buy-the-dip opportunity. Investors were rightly cautious about the company’s bottom line erosion amid a volatile economic backdrop.
However, shares of the retail company have gained close to 30% since the end of October, as investors expect interest rates to decline in 2024 and the economy to avoid a full-blown recession next year.
But investors should expect Ulta Beauty stock to remain volatile in the near term, as spending patterns are under pressure. In fact, there is a chance for Ulta Beauty and its peers to lower product prices to boost traffic at their retail stores and online platforms.
During its earnings call, Ulta Beauty raised its guidance for Fiscal 2024 and aims to end the year with $11.1 billion in sales, up from the prior-year figure of $10.2 billion in 2023. It indicates annual sales growth of 9.4%, which is quite exceptional, given the current economic environment.
Moreover, Wall Street expects Ulta Beauty to increase its revenue by 4.6% to $11.67 billion in Fiscal 2025. Comparatively, its adjusted earnings per share is forecast to expand from $24 in Fiscal 2023 to $27 in Fiscal 2025.
A Look at Ulta’s Liquidity Position
In the first 10 months of 2023, Ulta’s management repurchased 1.8 million shares worth $841 million, which suggests company executives believe the stock is undervalued. Due to these buybacks, Ulta’s cash balance has fallen by 50% year-over-year. To boost its liquidity position, Ulta increased short-term debt by $200 million in the quarter.
But retail stocks typically experience a drawdown in cash balances in the fall as they shore up inventory positions for the all-important holiday season. For instance, Ulta’s cash balance rose from $250.6 million in Q3 of Fiscal 2023 to $737 million in Q4 of 2023 (ended January 2023). It currently stands at $121.8 million.
Is ULTA Stock a Buy, According to Analysts?
Priced at two times forward sales and 18.3 times forward earnings, ULTA stock is not expensive compared to the S&P 500’s earnings multiple of over 20x. Out of the 20 analysts covering ULTA stock, 15 recommend a Buy, four recommend a Hold, and one recommends a Sell. The average ULTA stock price target is $537.20, which is 8.9% above the current price.
The Takeaway
Ulta Beauty emphasized that the holiday season was off to a good start, which allowed it to raise its full-year guidance for Fiscal 2024. An increase in store count should enable Ulta to see revenue growth in the upcoming decade, while profit margins are bound to improve when inflation cools down and interest rates are rolled back.
I believe ULTA stock is fairly valued and is positioned to beat the S&P 500 Index next year, given upbeat consensus estimates, rising in-store traffic, and its strong financials.
