Cosmetic retailer Ulta Beauty Inc ULTA reported a third-quarter earnings beat Thursday, but sales missed estimates by $75 million.
Cosmetic Industry Weakness
Buy-side expectations have come way down on Ulta, leading the company to deliver a surprise earnings beat amid worsening macro and makeup industry environments, Wells Fargo analyst Ike Boruchow said in a Thursday note.
The cosmetics category continues to decelerate, the analyst said, adding that Ulta acknowledged these headwinds and believes they will persist for a while.
Ulta will continue to be a highly debated stock over the short-term until fundamentals move in either direction, he said, and “the fact that management continues to be extremely cautious on the top-line visibility in the business today is likely to keep bears engaged.”
Wells Fargo maintaine a Market Perform rating on Ulta and raised the price target from $235 to $250.
New Brands Driving Ulta
Ulta's third-quarter results and outlook were better than feared, but uncertainty regarding longer-term earnings growth continues to be an overhang on the stock in the near-term, Baird analyst Mark Altschwager said in a Thursday note.
“While the category backdrop in cosmetics remains challenging, it is no worse than management’s previously lowered expectations,” the analyst said.
The company is benefiting from the new brands Millie Bobby Brown, Tracee Ellis Ross, Thrive and KKW, he said, adding that Ulta management expressed confidence in comp acceleration in the fourth quarter. Ulta saw third-quarter comps of 3.2%.
Ulta is adapting to a lower-growth backdrop as longer-term earnings growth remains a concern, Altschwager said, adding that if comps grow in the fourth quarter, it could set up an encouraging FY2020.
“If Ulta can exit F2019 with comps at a 3-4% trajectory (against toughest compare of the year) we have increased confidence that Ulta could sustain +4-5% comps next year.”
Baird maintained an Outperform rating with a $315 price target.
Raymond James: Ulta's Valuation Is Fair
While Ulta continues to gain market share and see solid growth in other categories, makeup-related headwinds are expected to continue into 2020, Raymond James analyst Joseph Altobello said in a Thursday note.
Due to weakness in the makeup category, the analyst said the stock’s depressed valuation relative to historical averages is fair, but added that he would be more constructive on the stock on signs of sustained comp acceleration.
Raymond James maintained a Market Perform rating on Ulta.
Celebrity Brands, Loyalty Program Drive Stock
Tigress Financial Partners Ivan Feinseth was notably more bullish on the company, saying Ulta continues to benefit from strong demand for its celebrity-led beauty brands that sell at a premium.
“Ulta Beauty’s exclusive lines of cosmetics, including lines from Kylie Jenner, YouTube makeup artist James Charles, and Jennifer Lopez's new fragrance, Promise, continue to drive strong in-store and online traffic,” he said.
Ulta “offers a very strong value proposition and leverages its customer database and loyalty program very well,” Feinseth said.
As the retailer continues to invest in e-commerce and expands its loyalty program, Feinseth said he believes significant upside exists for the stock and continues to recommend purchase.
Ulta shares were down 2.23% at $256.36 at the time of publication Monday.
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