Bull of the Day: Ulta Beauty, Inc. (ULTA)

Ulta Beauty, Inc. ULTA is the largest U.S. beauty retailer and its business continues to thrive amid economic slowdown fears and inflation concerns. Ulta topped quarterly estimates on August 25 and raised its outlook once again as shoppers continue to spend big on the simple pleasures in life such as beauty.

Beauty is Booming

Ulta Beauty began to reshape the broader beauty retail space back in the early 1990s by bringing everything under one roof. Today, its rather large format stores offer cosmetics, fragrances, skin care products, hair care, salon services, and more. Ulta sells an array of brands across a variety of areas and price points from higher-end companies to its own store brands.

Ulta operates roughly 1,300 retail locations across all 50 states. Alongside its brick-and-mortar retail footprint, Ulta’s e-commerce offerings are gaining traction. The company is focused on rolling out more how-to-style videos, tips, and tutorials online. This helps mimic Ulta’s hands-on customer experience at stores that allows shoppers to try on and test various products with the help of its sales associates.

Ulta’s ability to expand its footprint and its customer base has helped it grow its top and bottom lines at truly impressive clips. Ulta opened 17 new stores and relocated 10 stores during the first six months of FY22 even as other retailers backed off on spending.

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Ulta posted double-digit revenue growth every year since its public debut in late 2007, outside of a pandemic/ lockdown pullback, with shoppers having far fewer reasons to do their hair and makeup. Ulta, at one point, posted a stretch of eight-straight years of roughly 20% or higher revenue growth.

Ulta bounced back in a huge way following its covid slip, with FY21 revenue up 40%. Plus, its adjusted earnings soared from $3.11 per share to $17.98 per share in 2021, which also crushed its pre-pandemic total of $12.15 a share.

Recent Growth & Improved Outlook

Ulta’s second quarter fiscal 2022 revenue jumped 17% to help lift its adjusted earnings by 25%. More importantly, the company raised its guidance as it sees strong trends in the beauty space despite slowing overall consumer spending and inflation headwinds.

Ulta raised its revenue outlook for the year to between $9.65 billion and $9.75 billion, up from $9.35 to $9.55 billion. Plus, it lifted its comparable sales guidance all the way to 9.5% to 10.5% vs. its previous 6% to 8% range. And it now expects adjusted earnings per share between $20.70 to $21.20 compared to its prior $19.20 to $20.10 guidance.

Analysts raced to update their EPS estimates following Ulta’s beat-and-raise release on August 25. The company’s upbeat bottom-line revisions help it land a Zacks Rank #1 (Strong Buy) right now, and it’s crushed our EPS estimates by an average of 33% in the trailing four periods.

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Current Zacks estimates call for Ulta’s revenue to climb 14% in 2022 to slightly under $10 billion and nearly 8% higher in FY23. Meanwhile, its adjusted earnings are projected to climb 18% this year and another 10% in 2023. And both of Ulta’s current FY22 and FY23 consensus estimates could move even higher.  

Outperformance and Value

Ulta stock is bucking the market’s downturn so far this year, with its shares up around 1% vs. its industry’s 23% decline and the S&P 500’s 16% drop. This is part of an 80% run over the past 24 months to blow away the market and its broader Zacks econ sector. And the nearby chart showcases Ulta’s 340% surge in the last decade.

At around $410 per share, Ulta trades 17% below its current Zacks average price target. On the valuation front, Ulta is trading at a discount to the wider retail space at 19.0X forward earnings vs. 22.6X. More importantly, the stock is trading at a 50% discount to its own 10-year highs and offers 28% value vs. its median despite its strong price performance.

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Bottom Line

Ulta is set to repurchase roughly $900 million worth of its own shares in FY22. The firm is able to support these buybacks through a sturdy balance sheet and a strong management team. Plus, the beauty industry is booming and it shows no signs of stopping in a world dominated by social media and staying on trend.

Ulta’s business remains strong in the face of slowing consumer spending because shoppers aren’t cutting back on its beauty offerings. It is also worth remembering that many higher-income shoppers are still flush with cash and spending on everything from travel to makeup. And there is even an established phenomenon known as the lipstick effect that highlights a willingness to buy the small, fun things when people can’t splurge on big-ticket items.

It has been no easy task to stay above the selling in 2022 and fewer and fewer companies are providing upbeat guidance. Therefore, it might not be surprising to know that 17 of the 21 brokerage recommendations Zacks has for Ulta are “Strong Buys,” with nothing below a “Hold.”

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