Ulta Beauty (ULTA) stock surged following its Q3 results, with investor confidence rebounding after a couple of years of sluggish share price performance. Despite this impressive post-earnings rally, Ulta’s stock still appears to have notable upside potential. Although the beauty products retailer faces muted sales growth and margin pressures, its discounted valuation and aggressive stock buybacks present an attractive investment case. Accordingly, I am bullish on ULTA and am committed to holding my shares.
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Subdued Sales Growth Is Not a Concern
Ulta Beauty continues to execute its growth strategy, leaving me bullish on the stock, even in the face of soft revenue growth. For Q3, Ulta posted a relatively weak 1.7% increase in revenues, which reached $2.53 billion. In fact, despite 57 new store openings over the past year that helped boost the consolidated top line, comparable sales growth came in at just 0.6%, signaling relatively flat sales on a per-store basis.
This sluggish growth can be attributed to several macroeconomic and industry-specific headwinds. The normalization of beauty category growth post-pandemic, elevated competition—particularly in prestige beauty—and a cautious consumer environment have all weighed on performance. Notably, according to management’s comments in the post-earnings call, these challenges have impacted transaction growth and customer spending per visit.
Yet, these short-term headwinds should not overshadow Ulta’s long-term growth strategy. The company’s recent Investor Day presentation highlighted plans to improve its omnichannel capabilities, expand its footprint, and deepen the engagement of its loyalty program. In particular, intending to reach 50 million active loyalty members by 2028, up from 44 million today, Ulta is laying the groundwork for sustained customer acquisition and retention, which I believe will prove to be a major tailwind to sales growth.
Margins Remain Solid despite Short-Term Pressure
Another reason for my bullish outlook on Ulta’s stock is that, even amid margin pressures, the company continues to demonstrate strong profitability. In Q3, gross margin declined slightly to 39.7% from 39.9% last year due to higher store and supply chain fixed costs. Further, the operating margin fell from 13.1% to 12.6%, primarily driven by increased SG&A expenses related to strategic investments.
The ongoing margin compression can also be linked to shifts in category performance. For instance, while fragrance delivered high single-digit comparable growth, other categories, such as makeup and haircare, saw low single-digit declines due to competition and lack of noteworthy product launches.
Nevertheless, Ulta’s margins were still decent, with profitability remaining strong overall. In that regard, Ulta benefited from its debt-free balance sheet, meaning the company didn’t have to pay any interest expenses during today’s high-rates environment, translating to a buffer during periods of subdued sales growth. In fact, Ulta’s net cash position even allowed it to generate interest income, further supporting its bottom line.
Valuation and Capital Returns Mix Is Too Compelling to Ignore
Returning to my original point, Ulta’s valuation is still too compelling to ignore even after its recent rally, especially when you factor in its strong capital returns profile. Consensus estimates for FY2024 EPS stand at $23.60, which implies a forward P/E ratio of just over 18. I believe this is a rather attractive multiple for two reasons.
Firstly, as current headwinds subside and earnings growth rebounds, Ulta’s P/E multiple is set to compress further, creating additional room for upside for the stock. Secondly, Ulta’s aggressive buybacks provide a significant tailwind.
The company repurchased $267 million worth of shares in Q3 alone and plans to buy back about $1 billion worth of stock this year, which should retire over 5% of its outstanding shares. Such substantial buyback volumes not only highlight management’s confidence in future earnings growth but should also lead to notable EPS accretion in the coming years.
Is ULTA Stock a Buy, According to Wall Street Analysts?
Wall Street analysts appear a bit more cautious about Ulta Beauty’s future prospects. In particular, ULTA stock features a Moderate Buy consensus rating with 13 Buys, nine Holds, and two Sells assigned over the past three months. However, at $404.83, the average ULTA stock forecast implies a 3.84% downside risk.
For the best guidance on buying and selling ULTA stock, look to Christopher Horvers. He is the most accurate and profitable analyst covering the stock (on a one-year timeframe), boasting an average return of 15.68% per rating and a success rate of 73%.
Final Thoughts
Ulta Beauty’s Q3 results were fairly solid given current industry conditions, while the subsequent share price surge stressed investors’ confidence in its future prospects. While sales growth and margins face short-term pressures, Ulta’s robust profitability, clean balance sheet, attractive valuation, and aggressive buyback form a compelling investment case.
With plans to grow its omnichannel capabilities and loyalty program, margins likely to bounce once cost pressures ease, and buybacks set to drive EPS accretion, Ulta stock offers great value at its current levels, in my view. For this reason, I will continue to hold my shares despite the recent gains.
