With shares of specialty beauty retailer Ulta (ULTA -1.75%) getting hammered this year, despite the S&P 500 rising sharply higher, the stock has started to look quite attractive. Shares are trading at less than 15 times earnings as of this writing — a huge discount compared to the S&P 500 and Nasdaq 100‘s price-to-earnings ratios of 24 and 31, respectively.
Will a close examination of the retailer’s stock reveal that it is as compelling as it appears on the surface? Or are the underlying business problems that caused the stock to drop this year too significant for investors to consider buying shares?
Slower sales
The main reason for the stock’s recent slide has been the company’s slowing sales. After growing comparable sales 15.6% in fiscal 2022, this key sales metric slowed significantly to 5.6% in fiscal 2023. In addition, comparable sales growth came in just 1.6% in the first quarter of fiscal 2024, prompting management to lower its full-year outlook for the sales figure. Management said in its fiscal first-quarter update that it now expects comparable sales to grow 2% to 3% for the full fiscal year — down from a previous forecast for 4% to 5% growth.
Highlighting some of the company’s challenges, management recently told investors that an intensely competitive environment has led to some market share loss in a few key areas. For the first quarter of fiscal 2024, Ulta gained overall beauty market share “but lost share in prestige beauty primarily driven by pressure in makeup and hair,” explained Ulta CEO Dave Kimbell in the company’s fiscal first-quarter earnings call.
Reasons to be optimistic
But investors shouldn’t turn a cold shoulder to Ulta stock just because the company is going through some near-term challenges.
First of all, it’s worth noting that Ulta is lapping some tough year-over-year comparisons. Comparable sales grew at a double-digit rate in the year-ago quarter. This makes it easy to forgive Ulta for its single-digit comparable sales growth rate in the first quarter of fiscal 2024.
Second, management didn’t seem concerned about its underperformance in prestige beauty. “I am confident we can reinvigorate market share gains,” Kimbell noted during the call before proceeding to highlight details about the company’s plans to improve assortment, social relevance, digital marketing, its loyalty program, and promotions.
Finally, and perhaps most importantly, the stock’s cheap valuation of just 14 times earnings arguably already prices in a period of slow growth. Management certainly seems to think shares are cheap; the company spent about $285 million repurchasing its shares during the first quarter alone and said it expected to buy back about $1 billion worth of its stock (nearly 6% of shares outstanding) this fiscal year. These planned repurchases reflect Ulta’s strong cash flow and the confidence management has in the company’s future, Ulta chief financial officer Paula Oyibo told investors during its fiscal first-quarter earnings call.
Overall, Ulta shares seem like a buy today. Though there’s always a risk that beauty retailer fails to successfully navigate an evolving and dynamic competitive marketplace for beauty products and sales trends deteriorate further, the company’s long history of growing sales and creating loyal customers suggests this outcome is unlikely. Further, the stock is trading at a valuation that already expects challenges — so even if it takes a while for Ulta to get its rhythm back, long-term investor returns from these levels could still prove to be rewarding.
Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Ulta Beauty. The Motley Fool has a disclosure policy.
