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Ulta Beauty: Buy, Sell, or Hold?

The demand for Ulta Beauty’s (ULTA) product and services has declined amid the COVID-19 pandemic because people are focused on buying necessities rather than beauty products. However, the company has been reopening its physical stores in a phased manner since May 2020, and even resumed its salon services recently. But is ULTA still a buy after reporting weak financial results for the fourth quarter? Let’s find out.

As one of the top beauty retailers, Ulta Beauty, Inc. (ULTA) gained 43.9% over the past nine months. All the company’s stores were again open by July 20, 2020, after a lockdown period,  and the company  had even resumed salon and brow services in all of its stores by January 30. The stock closed yesterday’s regular trading session at $347.50 after hitting its all-time high of $351.

However, ULTRA  reported weak financials for the fourth quarter (ended January 30, 2021) and the stock retreated 7.6% in the after-hours trading. News concerning  the transition of the company’s CEO was also reflected in the after-hours trading.

We think that while ULTA’s performance may improve in the long run as more customers return to the stores in the  pandemic’s wake, its near-term prospects don’t seem very promising.

Here’s what we think could shape ULTA’s performance in the near term:

Strategic Partnerships

Last November, ULTA entered  a strategic, long-term partnership with Target Corporation (TGT). The goal of the partnership is to  transform the beauty landscape by leveraging each company's strengths. While TGT has reinvented its beauty business by expanding its product assortment and creating an engaging in-store shopping experience, ULTA has strong brand awareness.

Furthermore, , the two companies together have more than 100 million active loyalty program members across Target Circle and Ultamate Rewards. So, the partnership should  help ULTA expand its reach. ULTA also partnered with clean beauty pioneer, Credo Beauty in June 2020.

Weak Financials

For its  fiscal 2020 fourth quarter, ended January 30, ULTA’s net sales declined 4.6% year-over-year to $2.20 billion, and its comparable sales decreased 4.8% year-over-year. Its Gross profit also decreased 4.4% year-over-year to $771.03 million for the quarter. And its  net income came in at $171.49 million, down 23% year-over-year. Its adjusted EPS also declined 11% year-over-year to $3.41 for the fourth quarter.

Suspended Expansion into Canadian Market

In May 2019, ULTA declared its aim to become a ‘global beauty retailer’ beginning with its entry into Canada's competitive cosmetics market. However, in September 2020, the company suspended those plans and opted instead to focus on U.S. operations and its ‘omnichannel capabilities’. The  expansion into Canada could have given ULTA  an edge. ULTA’s impairment, restructuring and other costs of $30.40 million for the fourth quarter (ended January 30, 2021) includes $13.20 million in costs related to the suspension of the planned expansion into Canada.

Consensus Price Target Indicates Downside

Wall Street analysts expect ULTA to hit $284.42 in the near term, which indicates a potential decline of 15.6%.

POWR Ratings Don’t Indicate Enough Upside

ULTA has an overall rating of C, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. ULTA has a grade of C for Value, which is  consistent with its forward price/sales of 3.20x, which is slightly higher than the industry average 1.34x. The stock has a C grade for Stability also. .

We have also given ULTA grades for Growth, Momentum, Sentiment and Quality. Click here to access all ULTA’s ratings.

ULTA is ranked #27 of 38 stocks in the B-rated Specialty Retailers industry.

Better than ULTA: Click here to access thirteen other top-rated stocks in the same industry.

Bottom Line

Although ULTA is one of the top beauty retailers, it faces intense competition from the likes of Estee Lauder Companies (EL), among others. Also,  while the company is expected to benefit significantly  from its partnership with TGT, investors are not thrilled that it suspended its plans to  expand into  the Canadian market. Considering ULTA’s recently reported weak financials and the announcement of its CEO’s transition, we think it wise to wait for some positive developments before betting on the stock.

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ULTA shares were trading at $321.32 per share on Friday morning, down $26.18 (-7.53%). Year-to-date, ULTA has gained 11.90%, versus a 4.91% rise in the benchmark S&P 500 index during the same period.



About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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