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Ulta Beauty stock moves without a clear single catalyst
Ulta Beauty (ULTA) has been trading in mixed territory recently, with a small 1 day pullback, a weaker past week, but a positive month and higher 1 year total return shaping the stock’s recent profile.
See our latest analysis for Ulta Beauty.
At a share price of $538.15, Ulta Beauty’s recent pullback, including a 4.57% 7 day share price decline and weaker year to date share price return, contrasts with a stronger 1 year total shareholder return of 36.02%. This suggests momentum has cooled after earlier gains as investors reassess growth prospects and risk.
If this kind of reset has you thinking about where else to look, it could be a good moment to scan for other potential opportunities using the 18 top founder-led companies
With Ulta Beauty trading at $538.15, a value score of 3 and a price that sits below the average analyst target, a key question is whether this recent pullback signals a genuine entry point or if the market is already assuming stronger growth ahead.
Most Popular Narrative: 25.9% Overvalued
Compared with the last close at $538.15, the most followed narrative pegs Ulta Beauty’s fair value at $427.41, framing the current pullback as still above that mark.
Ulta, the other company I was thinking of cutting, has a surprisingly favorable relative valuation in the beauty retail space. It has decent margins and actually is able to direct decent amounts of buybacks. Beauty products in particular make a lot of sense to be sold alongside salon services in a storefront so you can actually suss out the high-end products in person. They have numerous private label brands and partnerships that attract customers, providing a small buffer to their expanding loyalty program. They are at their lowest ever P/E ratio right now at only 13, but with a high P/S and book ratio of 7, which is odd to me. They have a strong Return on Capital Employed (ROCE) and are free from debt. However, being a pure-play storefront with little room to grow aside from the untested waters of abroad leaves this company with a likely case of declining margins and earnings before only being able to grow modestly in the future. It is certainly a giant that can grow bigger, but the execution risk amid growing competition from e-commerce and other legacy storefronts in the US may take away their market share in areas that are already saturated with stores. Perceived undervaluation is mostly tangible under assumed multiple expansion, which doesn’t leave a whole lot of room for an edge. Morningstar has the following to say: “We believe it carries more products and brands in the major beauty categories of makeup, hair care, skin care, fragrance, bath, and accessories than any other US specialty beauty retailer. According to the National Retail Federation, Ulta and wide-moat LVMH’s Sephora are the only two specialty beauty retailers among America’s 100 largest retail companies. Although Ulta faces significant and increasing competition, we believe it has a unique market position and loyal customers. As evidence of its competitive edge, its adjusted return on invested capital, including goodwill, has consistently been above our 9% estimated weighted average cost of capital. We estimate Ulta’s adjusted ROIC, including goodwill ROIC, will average 27% over the next decade… We view Ulta’s ability to thrive in a very crowded marketplace as evidence of a competitive edge… We view Ulta’s strong margins as evidence of its competitive edge… We think Ulta’s salon services with 8,000 stylists provide a competitive advantage. The $60 billion (IBISWorld estimate) US hair salon industry is very fragmented, as national chains (such as those franchised by Regis) have less than 10% share… We believe Ulta has opportunities for store growth despite its large base. The chain has expanded rapidly, having added about 1,000 locations since the end of 2008. As Ulta now has stores in all 50 states and all major metropolitan areas, we believe its store openings will slow. Unlike some competitors (including Sephora), Ulta has no stores outside the US. The firm had planned to enter Canada in 2021, but this expansion was put on indefinite hold. Instead, Ulta’s first international expansion will be into Mexico through a partnership with Grupo Axo… Due to the ease of launching products online and marketing them through platforms like Instagram, it has never been easier to launch new beauty products. Many of them fail, but some of them have found success. Ulta has been proactive in seeking new brands and offering them in its stores… We estimate Ulta will achieve 4% compound average sales growth over the next 10 years, well below its 16% average annual sales growth over the past decade. We forecast 4% yearly same-store sales growth in the long term.”
The tension here is clear. Slower projected sales growth, firm profitability, and a premium future earnings multiple all feed into that $427.41 fair value. Want to see exactly how those pieces fit together and why the narrative still lands well below today’s price?
Result: Fair Value of $427.41 (OVERVALUED)
Have a read of the narrative in full and understand what’s behind the forecasts.
However, this view could be challenged if Ulta’s beauty retail peers re-rate higher, or if execution on Mexico and other new markets materially outperforms expectations.
Find out about the key risks to this Ulta Beauty narrative.
Next Steps
The debate around Ulta’s valuation is clear, so now is a good time to move quickly and stress test the upside narrative for yourself with the 2 key rewards.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Companies discussed in this article include ULTA.
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