Down 30% From Its 52-Week High, Is Now the Time to Buy Ulta Beauty Stock?

It's often said that beauty is in the eye of the beholder. In this case, the market hasn't been too fond of Ulta Beauty (NASDAQ: ULTA) , with the stock down about 30% from its 52-week high. Softer growth to start the year from this cosmetics retailer and hair salon operator has driven a reset of expectations in recent months.

Still, I believe investors have several reasons to turn bullish on this category leader in a good position to rebound. Let's explore why shares of Ulta Beauty could make a beautiful addition to your portfolio now.

Mixed trends to start 2024

The first-quarter update from Ulta Beauty wasn't great, but deserves some important context.

For the period ended May 4, the company reported year-over-year net sales growth of 3.5%, a positive figure but also representing a slowdown compared to the 12.3% rate in the prior-year quarter. Q1 earnings per share (EPS) of $6.47 was down from $6.88 last year, but still up on a stacked two-year basis compared to $6.30 in Q1 2022.

Management noted the particularly strong comparison period at the start of 2023 and believes the current environment simply reflects a period of normalization following the post-pandemic boom. Nevertheless, the weaker-than-expected start to the year prompted an adjusted full-year guidance, which helps explain the stock price volatility in recent months.

Ulta Beauty now sees 2024 comparable sales growth between 2% and 3%, down from the prior 4% to 5% outlook. Similarly, a full-year EPS target of $25.20 to $26 compares to a higher $26.20 to $27 forecast range announced earlier this year, and the $26.03 result for 2023.

ULTA Revenue (Annual) data by YCharts

The outlook remains positive

My takeaway is that despite the mixed trends, the big picture for Ulta Beauty remains positive. Sales and earnings have more than doubled over the past six years with the company continuing to generate profitable growth and strong underlying cash flows.

From a high-level perspective, the company's shifting operating environment is part of a broader market theme. Even as the S&P 500 index continues to make new highs, several consumer-facing companies including Starbucks and Nike have all cited a headwind of customers turning more cautious toward discretionary spending.

By this measure, Ulta Beauty appears to be faring relatively well and stands out through its unique market positioning and business model. The one-stop shop for beauty supplies with more than nearly 1,400 locations, coupled with in-store salons and a major online presence has worked to redefine the industry.

The company's partnership with Target with more than 500 Ulta shop-in-shops as well as a deal with DoorDash to include Ulta items within its delivery marketplace highlights an omnichannel approach.

E-commerce sales have been a strong point, with the company's app-based rewards program now counting 44 million loyalty members. The upside here is that these customers are recognized for a high level of engagement and repeat purchases. The ability to keep opening new stores and expand the ecosystem offers a path for significant long-term growth opportunities.

Image source: Getty Images.

Why I'm bullish on Ulta Beauty

With some confidence that Ulta Beauty's long-term strategy remains on track, I believe the stock is attractive at the current level.

Following the large sell-off, there is a case to be made that the company's muted near-term trends have been sufficiently priced in, setting up the potential that upcoming quarterly results will outperform a low bar of expectations.

In terms of valuation, Ulta is trading under 16 times forward earnings as a forward price-to-earnings (P/E) ratio based on the midpoint of management's 2024 EPS guidance. Notably, this multiple represents a discount compared to the average for the metric, which has been above 20 in the last three years.

My interpretation is that shares have good value at the current level and could be trading much higher by this time next year.

Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends DoorDash, Nike, Starbucks, Target, and Ulta Beauty. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy .