Ulta Beauty stock (NASDAQ:ULTA) has dipped by about 20% year-to-date. Yet, the more it falls, the more I am inclined to buy. As the leading specialty beauty retailer in the U.S., Ulta Beauty continues to deliver strong results. Although its sales growth has decelerated recently, scaring investors, Ulta remains highly profitable. Further, the company returns capital to shareholders aggressively. Along with shares trading at an attractive valuation, Ulta appears to have substantial upside potential. Thus, I am bullish on the stock.
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Q1 Results: The Market Is Missing the Point
Seeing how the market reacted to Ulta’s Q1 results, it seems that investors are missing the point about what makes the company an attractive investment at the present moment. Investors seem to worry about a noticeable slowdown in Ulta’s revenue growth, which explains why the stock remains near its 52-week lows post-earnings. Although this concern is not unfounded, it misses the core reasons why Ulta’s bullish case is compelling today — its exceptional profitability and attractive valuation.
Is Ulta’s Revenue Growth Slowdown Too Worrisome?
Before we examine Ulta’s profitability and current valuation, let’s examine its revenue growth and check whether the ongoing slowdown is too worrisome. Long story short, I don’t find it concerning, as I briefly mentioned in the introduction. Admittedly, the 3.5% growth in net sales during Q1 indicates a notable deceleration, marking the weakest top-line performance in quite some time—it is the poorest revenue growth over the past 13 quarters, to be precise. However, it’s crucial to consider this within context.
Specifically, I believe that Ulta’s most recent revenue figure marks a normalization following a series of remarkable growth over several quarters previously. The first-quarter results faced tough comps from last year (Q1 2023), when net sales grew by a notable 12.3%. Furthermore, going back another year (Q1 2022), we saw an even more remarkable upsurge of 65.2% in net sales.
Therefore, it makes more sense to focus on Ulta’s sustained ability not only to uphold these heightened sales levels but also to grow beyond them rather than translate its recent sales figures as a notable deceleration.
Ulta Remains Highly Profitable
Sales aside, Ulta remains highly profitable, which marks the core point of my bullish case. Note that the company’s operating margin declined from 16.8% to 14.7% in the first quarter. This was mainly due to lower merchandise margins and higher inventory shrink, which compressed its gross margin and higher SG&A expenses. Still, since Ulta has a clean balance sheet with not a single dollar of long-term debt, the bulk of its operating income ended up in the bottom line, with its net income margin coming in at 11.5%.
With comparable store sales on the rise and ongoing store openings, Ulta’s margins are likely to rebound, especially with easier comps on the horizon. Specifically, in Q1, same-store sales rose 1.6% compared to last year, driven by a 1.3% growth in transactions and a 0.3% gain in the average ticket. Also, the company opened 12 new stores during the quarter, closed just two, and relocated one, ending the period with a record number of locations (1,395). This trend should allow Ulta to achieve economies of scale over time.
In fact, Wall Street anticipates a return to earnings growth in the second half of the year, which should offset any challenges faced during the first half. Consequently, earnings per share (EPS) for FY2024 are projected to remain stable year-over-year. Thus, Ulta will remain highly profitable this year despite the stock’s performance suggesting otherwise.
Valuation and Capital Returns Signal Buying Opportunity
With Ulta’s profitability remaining strong and its share price having fallen substantially lately, the stock’s valuation has been compressed to very attractive levels. Combined with Ulta’s aggressive capital returns, the stock seems to present a compelling buying opportunity.
In particular, even with earnings expected to remain flat this year, Ulta is trading at a forward P/E of just under 15 at its current levels. This is one of the most humble multiples the stock has ever traded at. In the meantime, the company has repurchased over $1 billion worth of stock over the past four quarters.
This translates to 5.5% of its outstanding shares at its current market cap—a very attractive buyback yield. Once more meaningful growth resumes, today’s repurchases should prove to have been highly accretive to EPS, further fueling a bullish sentiment, in my view.
Is ULTA Stock a Buy, According to Analysts?
Regarding Wall Street’s view on the stock, Ulta Beauty features a Moderate Buy consensus rating based on 13 Buys, eight Holds, and one Sell assigned in the past three months. At $488.76, the average ULTA stock price prediction suggests 25.3% upside potential.
If you’re unsure which analyst you should follow if you want to buy and sell ULTA stock, the most profitable analyst covering the stock (on a one-year timeframe) is Christopher Horvers from JPMorgan (NYSE:JPM), with an average return of 17.26% per rating and a 69% success rate. Click on the image below to learn more.
The Takeaway
To conclude, I believe that despite recent concerns about Ulta’s revenue growth slowdown, viewing the stock’s investment potential from the right perspective reveals a more promising story. The company keeps growing against tough comps while its profitability remains very strong. Further, management’s aggressive capital returns underscore the current undervaluation. The ongoing buybacks will likely prove to be highly accretive to EPS in the coming years. Thus, I will be a buyer, even if shares continue to decline.
