Underwhelming Guidance Is Not A Good Look For Ulta Beauty

Ulta Beauty (ULTA) stock has recovered nicely since November’s announcements about COVID-19 vaccines. Over the past six months, shares of the cosmetics retailer have rallied nearly 49%.

Earnings are expected to see a solid rebound this fiscal year, which ends in January 2022. It still might take time for earnings to bounce back to their high-water mark, which was set in the fiscal year immediately preceding the pandemic.

Ulta is adapting to the new normal, shifting away from its prior strategy, which was to expand the number of physical stores and move towards e-commerce-related growth. This plan could prove successful, but continued challenges might make it tough for shares to post additional gains.

A Full Recovery For Ulta Stock May Remain Elusive

Per Ulta’s results for last quarter, ending Jan. 31, 2021, sales compared to the same quarter in the prior year, before the pandemic hit, were down by only around 4.6%.

In anticipation of these better-than-expected results, investors aggressively bid up shares, as seen by the jump from around $210 per share last November to $347.50 in March. (See ULTA stock analysis on TipRanks)

That said, based on the company’s guidance, challenges remain. Outgoing CEO Mary Dillon remains confident that Ulta’s underlying business will get stronger as the vaccine rollout continues. However, Ulta’s outlook for 2021 predicts another year in which revenue will fall short of 2019 levels. Along with Dillon’s departure after eight years as CEO, and Ulta’s plans to open only 40 new stores in 2021, investors are concerned about Ulta’s growth potential.

So far, this mixed guidance has had only a moderately negative impact on the ULTA stock price. Still, due to the risk implied by this uncertainty, shares may be set to pull back a bit more.

Possibility Of A Pullback

Mixed guidance, and the recent cooling following its hot run from last fall through the start of spring, point to possible lower prices for Ulta Beauty shares.

This potential pullback, which could be chalked up to investor impatience, may work in favor of patient investors.

As it stands now, Ulta sports a premium valuation, given that its business rebound remains a work in progress. Trading for 33.2x forward earnings, its valuation could see some slight contraction. A 10%-15% pullback, which is toward the low end of analyst estimates, seems plausible in the near-term. That will be true especially if earnings for the current quarter underwhelm as well.

Even as the recovery timeline for Ulta remains longer than for other retailers, investors with a longer time horizon may find opportunity here if shares fall back below the $300 per share mark.

Analysts Chime In

According to TipRanks’ analyst rating consensus, ULTA stock comes in as a Moderate Buy. Out of 19 analysts covering the stock, 13 rate it a Buy, 6 analysts rate it a Hold, and 0 analysts rate it a Sell.

As for price targets, the average analyst price target on ULTA stock today is $345.33 per share, implying around 6.49% upside potential.

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Bottom Line

The markets were justified in bidding up this stock on vaccine optimism, and the slow crawl back to the old normal points to business as usual for bricks-and-mortar focused retail plays such as Ulta.

However, the company is now seeing just a partial recovery. Social distancing and mask orders have not totally decimated the demand for beauty products, but they certainly do not help. Once the U.S. moves beyond these measures, Ulta Beauty can leave last year’s headwinds behind.

With this in mind, investor interest could continue to cool as the rebound takes longer than expected. Yet, with the potential for results to hit their high-water mark within the next year or two, investors interested in ULTA stock may find opportunity here, when and if a double-digit pullback occurs.

Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.