Ulta Beauty Faces Headwinds From Slowing Trends, Notes Analyst

Zinger Key Points
  • Goldman Sachs analyst lowers the price target from $607 to $605.
  • Analyst Kate McShane lowers EPS estimates to $26.17 from $26.61.

Goldman Sachs analyst Kate McShane reiterated a Neutral rating on the shares of Ulta Beauty Inc ULTA and lowered the price target from $607 to $605.

The analyst has looked into quarter-to-date trends for ULTA in y/y growth for observed sales, observed transactions, and average transaction value. 

According to the analyst, the observed sales were relatively flat for the week ending March 24, compared to -3.0% in the prior week.

The quarter-to-date average is about +1.1%, which is at the lower end of the company’s 1H guide to +low single digit, noted the analyst.

Observed transactions also improved sequentially in the week ending March 24 at -0.8%, while average transaction value remained relatively consistent at +0.8%, said the analyst.

Regarding data for eyes, facial, lipstick, and nail polish, sales for the mass segment within these categories decreased by -2.7% in Feb ’24, relatively in-line with -2.6% in Jan ’24, pointed the analyst.

ULTA is facing several years of difficult top line comparisons across its major categories, with the company calling out unprecedented growth in the beauty category over the last three years, according to the analyst.

While ULTA continued to gain share in mass in 4Q, market share in prestige was more challenged due to lapping strong share growth in 2022 and ongoing pressure from increased points of distribution for prestige beauty. 

Members of ULTA’s loyalty program generate the vast majority of its sales at over 95% and loyalty members shop at ULTA more frequently and spend more on average, said the analyst.

As part of its fourth-quarter earnings release, ULTA guided FY’24 to a comparable sales of +4-5% with 1H comp growth in the low-single-digit range, increasing to the mid-single-digit range in 2H, noted the analyst.

Per management, if the category slowdown continues to be faster and larger than anticipated, they would expect the first-quarter comp to be on the lower end of the 1H guide.

Based on quarter-to-date trends for ULTA and the beauty industry, the analyst lowered the first quarter comp growth estimate to +1.0% from +2.5% and FY24 comp growth estimate to +3.8% from +4.3%.

The analyst also lowered FY24 EBIT margin estimate to 14.1% from 14.3% and EPS estimates to $26.17 from $26.61.

The analyst concluded that the company’s share loss in prestige continues to be a headwind, and trends in the beauty industry may be slowing as it laps three years of strong growth.

Price Action: ULTA shares are trading higher by 2.53% at $456.02 on the last check Monday.

Photo via Wikimedia Commons

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