Should Investors Buy The Dip In Ulta Beauty? The Street Debates

Retailer Ulta Beauty Inc ULTA reported an earnings beat in its third-quarter results, while sales fell inline with expectations but management's outlook for the holiday quarter fell short of the Street's estimates.

Here is a summary of how some of the Street's top analysts reacted to the print.

The Analysts

  • Wells Fargo's Ike Boruchow maintains an Outperform rating on Ulta Beauty with a price target lowered from $336 to $328.
  • Baird's Mark Altschwager maintains at Outperform, price target lifted from $320 to $330.
  • Raymond James' Joseph Altobello maintains at Market Perform, no assigned price target.
  • BMO Capital Markets' Shannon Coyne maintains at Market Perform, price target lifted from $230 to $280.

Shares of Ulta Beauty were trading lower by 10 percent at $263.36 Friday afternoon.

Wells Fargo: Long-Term Beauty Of A Stock

Ulta Beauty's management guided comps to be 7.8 percent in November so the key focus on the report was margins, Boruchow said in a note. Unfortunately margins fell short of expectations and likely caused some investors to question management's prior long-term outlook of modest operating margin expansion.

Boruchow said investors should focus on the multiple positive takeaways from the quarter, including flat promotional activity and a "robust" comp performance despite a highly competitive environment.

The company's status as a best-in-class retailer should remain in place, the analyst said, and management should show margin deleverage from more occupancy and labor leverage while the distribution center in Fresno will also become less of a headwind.

Baird: Messy Margins Should Improve

Ulta's earnings was supposed to be "rather uneventful" but it turned into a "somewhat messy" quarter with a margin miss, Altschwager said. The company attributed its margins mess to an early quarter clearance event that took longer than expected and expanded to include deeper discounts.

The research firm's conversations with management reassured that the third-quarter margin woes won't recur in the fourth quarter and this was a "unique event" as part of an early 2018 store reset initiative instead of aged inventory or product problems.

Raymond James: Valuation Reflects Growth

The margin miss in the quarter was unexpected, Altobello said, and also creates an uncertain outlook for margins moving forward. While the company continues to gain meaningful market share in a highly competitive environment this is already reflected in the stock at current levels.

BMO: Expectations Are Too High

Ulta's management guidance for a low teens percentage revenue growth, 7 to 8 percent comps growth and a low 20 percent EPS growth looks achievable, Coyne said. However, the Street's expectations for outsized performance is likely too high and the stock's multiple is likely to move lower to be more inline with other growth retailers at 19 times.

Related Links:

Ulta Beauty Shares Soar After Strong Earnings, New Partnerships

4 Reasons Why Sally Beauty Was Hit With A BofA Downgrade

Photo credit: Mike Mozart, Flickr

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