Ulta Beauty Inc (ULTA) Fundamentals Remain Solid; Piper Jaffray Sees 47% Upside

As Ulta Beauty Inc (NASDAQ:ULTA) readies to release second quarter results this coming Thursday, analyst Erinn Murphy of Piper Jaffray has put out a bullish note, anticipating continued growth for the cosmetics chain.

The analyst expects Q2 EPS of $1.77 – the top end of company’s guidance range. Given new brand launches and the “on-going benefit from the 5.2M new loyalty customers acquired on a TTM basis”, the analyst foresees an upside to her estimate. While the market narrative for gross margins has been negative, Murphy believes Q2 gross margins likely could best her estimate of 35.9%.

The analyst wrote, “While there has been a lot of noise YTD on department stores promoting the category, Amazon & choppier growth within mass, we believe ULTA’s stock (down 22% in 8 weeks) more-than-reflects these concerns […] we believe ULTA’s underlying fundamentals remain solid and we see upside to Q2’s comps on inline-with-expectations gross margins. Further, we have put together a proprietary beauty pricing basket looking at 85 items on Ulta & Amazon. To wit, Ulta is 4.2% cheaper than Amazon with the greatest cost advantage coming from cosmetics (~72% of Ulta’s dollar growth LY), keeping it more insulated from the Amazon threat.”

Furthermore, Murphy opines that “Ulta is getting access to better brands which should help drive ATV–albeit with prestige boutiques as a headwind to margin rate (not margin dollars),” for example, the analyst writes,“Bumble & Bumble just launched on Ulta.com this past weekend and will launch in 500 Ulta doors starting on Sept 10.” Moreover, the analyst predicts that in the wake of Estée Lauder’ fourth quarter beat, “ULTA remains a share gainer– a message reinforced on EL’s call on Friday.”

As such, the Analyst maintains an Overweight rating on ULTA with a price target of $330 a 47% rise over current trading levels. (To follow Murphy’s track record, click here)

Out of the 13 analysts polled by TipRanks (in the past 3 months), 6 are bullish on ULTA stock, while 7 are sidelined. With a return potential of nearly 31%, the stock’s consensus target price stands at $319.50.

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