Analysts Like Ulta Beauty Inc (ULTA) Long-Term Prospects as Shares Nosedive 9%

Though Ulta Suffers Short-Term Struggles Amid a Tough Industry Setting, Analysts Recognize Positives Too

Ulta Beauty Inc (NASDAQ:ULTA) shares are crashing roughly 9% today as investors are showing their displeasure with the spa and beauty supplies retailer’s second-quarter performance. Sometimes it does not take a massive miss, but a showcase that is simply not up to par with high upside expectations.

From the eyes of Oppenheimer analyst Rupesh Parikh, though the company’s financial quarterly results could be judged as “another best-in-class report, especially in the context of a softer beauty backdrop,” the truth is investors were still left shortchanged. This is a story of comps eclipsing what was yet another robust print from the company.

Though Ulta’s fundamental opportunities have Parikh quite bullish long-term, when looking at the rockier short-term picture, the analyst reiterates a Perform rating on shares of ULTA with a $250 price target, which represents a just under 17% increase from where the stock is currently trading. (To watch Parik’s track record, click here)

For the second quarter, comps surged 11.7%, just under the Street’s expectations of 12%, but within management’s guide looking for 10% to 12%. When glancing at a “two-year stacked basis,” comp trends dipped from +29.5% in the first quarter to +26.1%.

The analyst believes, “Comp upside remains a key driver of shares. […] The moderation is directionally consistent with our expectations, as we highlighted in our downgrade note (7/31/17 at $248.60) and in our preview this week, but appears to be self-inflicted, driven by a reduction of promotional intensity vs. a ‘true moderation,’ based on our interpretation of company commentary.”

For the third-quarter guide, the Ulta team projects EPS in the high-20s percentage range, a boost from the prior estimate seeking mid-20s, implying EPS between $8.28 to $8.41 and comp growth of 10% to 11%. Subsequently, the analyst has bumped up his EPS expectations.

Overall, “The results again demonstrate the management team’s success in gaining market share from a wide variety of players,” argues Parikh. Yet, the problem lies in an atmosphere of fiercely growing rivalry and an industry showing signs of cracking: “Near term, however, we remain concerned about a weaker beauty backdrop and potentially intensifying competition later this year, supporting our Perform rating.”

Piper Jaffray analyst Erinn Murphy is not stepping to the sidelines quite yet, but she absolutely is left questioning her valuation model for shares, particularly taking under account ongoing shifts in the industry as well as among consumers. However, long-term, the analyst likewise bets on this stock’s potential for shares to capture gains even amid a rocky industry backdrop.

Acknowledging that investors needed to “[digest]” the analyst maintains an Overweight rating on Ulta stock while slicing the price target from $330 to $260, which implies a 21% increase from current levels. (To watch Murphy’s track record, click here)

“Prestige continues to drive the majority of comp $ and outpace the chain. Skincare, fragrance & hair care accelerated in the quarter and were above plan,” notes the analyst who commends the pipeline for the back half of the year as “loaded.”

“Shares of ULTA were volatile in the aftermarket as investors digested Q2’s results. Conversations into the print were acutely focused on gross margin given the negative industry narrative led by department store promotional activity. However, GM% nicely outperformed expectations (+40 bps vs. +10 bps) as ULTA proactively eliminated a clearance sale in last year’s base. Further, management struck a tone of control over their business as ULTA continues to play offense in the industry. Importantly, softness has not yet occurred in Hispanic-heavy regions and management countered Amazon concerns by citing strong velocity in key overlapping categories of investor concern. We lower our PT but continue to rate shares OW given the share-growing characteristics ULTA possesses,” surmises Murphy.

TipRanks analytics demonstrate ULTA as a Buy. Out of 16 analysts polled by TipRanks in the last 3 months, 9 are bullish on Ulta stock while 7 remain sidelined. With a return potential of 32%, the stock’s consensus target price stands at $283.92.

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