Ulta Beauty, Inc. (ULTA), a leading retailer in the beauty and cosmetic industry, has experienced a significant decline in its stock price, falling below critical technical thresholds, including its 200-day moving average. This moving average is a crucial indicator for gauging market trends and momentum. The stock’s recent close at $393.84, below the moving average of $436.89, has raised investor concerns about the stock’s short-term outlook, suggesting potential for further downside if these levels are not reclaimed.
Over the past six months, Ulta Beauty shares have dropped by 22.1%, outpacing the industry’s 12.2% decline. This decline stands in stark contrast to the S&P 500’s 9.4% gain during the same period. The stock currently sits below its 52-week high of $574.76.
This decline in stock price can be attributed to a confluence of broader market dynamics and specific challenges encountered by the company. Let’s delve into the headwinds behind ULTA’s dismal stock performance.
Decoding Headwinds Behind ULTA’s Dismal Stock Performance
Ulta Beauty is currently grappling with challenges within the prestige beauty sector. According to Circana data for the 13 weeks ended Aug. 3, 2024, the company maintained market share in mass beauty, while experiencing a decline in the prestige beauty market, particularly in makeup and hair categories. This loss of market share suggests that consumers are shifting away from premium offerings, likely due to inflationary pressures and a growing emphasis on value.
Ulta Beauty is also facing increased competitive pressure with the emergence of new distribution channels for prestige beauty products. This heightened competition further adds to the challenges the company is facing.
The company encountered unexpected operational challenges stemming from its Enterprise Resource Planning (ERP) system transformation in the second quarter of fiscal 2024. The transition between old and new systems caused disruption in in-store inventory allocation. To mitigate future disruptions, ULTA is identifying key legacy processes causing friction and implementing proactive monitoring and dedicated support to address issues swiftly.
Another factor contributing to ULTA’s performance woes is the effectiveness of incremental promotions. While these promotions drove traffic and sales on the company’s digital platforms, they failed to generate a meaningful uplift in Ulta Beauty’s brick-and-mortar stores. This increased frequency of offers, with new structures, pressured the average selling price without leading to additional purchases in stores.
Ulta Beauty’s Weak Gross Margin and High Costs
Ulta Beauty experienced a contraction in gross margin during the second quarter due to lower merchandise margin and fixed cost deleverage. This decrease in merchandise margin stemmed from increased promotional activity, adverse impact from the brand mix, and the continued lapping of benefits from price increases last year. For fiscal 2024, the company anticipates a decline in gross margin, as lower merchandise margin and deleverage of store fixed costs are expected to be only partially offset by growth in other revenues and lower transportation costs.
Ulta Beauty has also been grappling with higher selling, general and administrative (SG&A) expenses. During the second quarter of fiscal 2024, SG&A expenses increased due to the deleveraging of store payroll and benefits, higher corporate overhead from strategic investments, and increased store and marketing expenses.
Revised Outlook of ULTA
In response to these challenges, Ulta Beauty has adopted a more cautious approach, revising its fiscal 2024 outlook downward at its last earnings call. The company now anticipates net sales to be in the range of $11-$11.2 billion, compared to the previous guidance of $11.5-$11.6 billion. Comparable sales are expected to be flat to down 2%, compared with the 2% to 3% growth projected earlier. Earnings for fiscal 2024 are envisioned in the band of $22.60-$23.50 per share, lower than the earlier guided range of $25.20-$26.
Ulta Beauty’s Earnings Estimates Decline
Ulta Beauty currently finds itself in a challenging position. The Zacks Consensus Estimate for earnings per share has experienced downward revisions. Over the past 30 days, analysts have decreased their estimates for the current and next fiscal year by 8.9% to $23.21 and 10.5% to $25.16 per share, respectively.
Factors Working in ULTA’s Favor
Ulta Beauty is focusing on reinforcing its competitive position and driving stronger performance through several initiatives. These include strengthening product assortment, increasing social relevance, enhancing the digital experience, leveraging a powerful loyalty program, and evolving promotional strategies.
Ulta Beauty is consistently attracting new and lapsed members to the loyalty program, experiencing healthy growth in platinum and diamond members. By the end of the second quarter of fiscal 2024, the company had 43.9 million active Ulta Beauty Rewards members, a 5% increase from the previous year. This growth in the loyalty program underscores the strength of the company’s brand awareness and loyalty, which is showing significant gains across multiple demographics.
With a distinct business model, Ulta Beauty offers unique and lasting experiences both online and in-store. Although some aspects have faced challenges, the company continues to engage effectively with customers. ULTA focuses on enhancing guest experiences, assortment, loyalty programs, services, and omni-channel offerings.
Unlocking Ulta Beauty’s Valuations
While Ulta Beauty’s stock is currently trading at a discount compared with its industry peers, this valuation disparity might not be as favorable as it seems. The lower price could be indicative of underlying issues rather than representing a clear investment opportunity.
Ulta Beauty is currently trading at a discount to its industry benchmarks. The stock has a forward 12-month P/E ratio of 16.09 compared with the industry’s forward 12-month P/E ratio of 16.59.
Ulta Beauty’s Investment Analysis
Ulta Beauty’s stock decline points to several challenges, including slowing beauty category growth, heightened competition, changing consumer trends, and ERP system disruptions. The company’s reduced fiscal 2024 guidance, coupled with negative sentiment from analysts, indicates that it could face ongoing difficulties.
While omnichannel expansion and loyalty program improvements are noteworthy, these may not be enough to counter current obstacles. With persistent issues and an uncertain future, investors should approach the stock with caution. Currently, Ulta Beauty stock carries a Zacks Rank #5 (Strong Sell).
Stocks to Consider
Here, we highlight three better-ranked stocks, namely Abercrombie & Fitch Co. (ANF), Sprouts Farmers Market, Inc. (SFM), and Nordstrom, Inc. (JWN), currently sporting a Zacks Rank #1 (Strong Buy) each.
Abercrombie & Fitch is a global, digitally-led, omnichannel specialty retailer of apparel and accessories catering to kids through millennials with assortments curated for their specific lifestyle needs. ANF has a trailing four-quarter earnings surprise of nearly 28%, on average. The Zacks Consensus Estimate for Abercrombie & Fitch’s current fiscal year’s sales and earnings indicates growth of 13.1% and 63.4%, respectively, from the year-ago reported numbers.
Sprouts Farmers Market engages in the retailing of fresh, natural and organic food products under the Sprouts brand in the United States. SFM has a trailing four-quarter earnings surprise of around 12%, on average. The Zacks Consensus Estimate for Sprouts Farmers Market’s current financial year’s sales and earnings suggests a rise of 9.6% and 18.7%, respectively, from the year-earlier reported figures.
Nordstrom, a fashion retailer, provides apparel, shoes, beauty accessories, and home goods. JWN delivered an earnings surprise of 29.7% in the last reported quarter. The Zacks Consensus Estimate for Nordstrom’s current financial year’s sales implies growth of 0.6% from the year-ago reported number.
