Between disappointing quarterly results, lowered guidance, and a handful of recent downgrades, Ulta Beauty (NASDAQ: ULTA) isn't exactly an exciting investment prospect at this time. Shares have fallen 33% from their February high to a two-year low, in fact, specifically because the market is losing hope.
But as the old adage goes, it's always darkest before dawn. Smart investors should see this steep sell-off as a buying opportunity rather than a warning, understanding that this is still a great company. It's just bumping into a cyclical headwind. Indeed, Ulta may even be through most of that headwind.
Ulta Beauty is bumping into a predictable headwind
If you're not familiar with it, Ulta Beauty is a cosmetics, fragrance, and skincare retailer. The company operates more than 1,250 brick-and-mortar stores selling products at a wide range of price points. Many of its stores are also salons, offering services like hairstyling, waxing, facials, and makeup application.
It's a competitive business, to be sure. Most major retailers also sell at least some of the same products, as do many of locally owned salons peppered across the country. It's becoming more competitive, too. As CEO Dave Kimbell pointed out during the company's first-quarter earnings call in May, more than 1,000 new places to purchase cosmetics opened just within the past couple of years. Some of these include spots that are inherently high-traffic too, like the Sephora shops inside many Kohl's .
Economic malaise isn't helping, of course. Even value-oriented fast-food chain McDonald's struggled to entice folks just looking for a low-cost meal last quarter-- the same fiscal struggle facing consumers mentioned by PepsiCo when it reported its second-quarter numbers recently.
End result? Ulta Beauty's total top-line growth for the three-month stretch ending in early May slowed to only 3.5%, with same-store sales only up 1.6%. And that's with pricing that didn't quite keep up with the company's own rising costs. Per-share profits actually fell from $6.88 to $6.47 during the quarter. Operating margins slipped from 16.8% of revenue to 14.7%.
ULTA Revenue (Quarterly) data by YCharts
Ulta suspects this malaise could linger for a little longer, too. Its previous sales guidance for the full year had been something between $11.7 billion and $11.8 billion. The revised range is between $11.5 billion and $11.6 billion. Earnings expectations were dialed back from somewhere between $26.20 and $27 per share to a range of only $25.20 and $26 now. No wonder the stock's down 33% in just five months.
Except, maybe the market's too fixated on the past and not paying enough attention to this company's foreseeable future. Forward-thinking investors may want to go ahead and take their shot on Ulta stock at its currently discounted price.
The case for buying Ulta stock on this dip
It's possible Ulta Beauty shares could still move lower before moving higher again. Most of the past, present, and potential bad news, however, is arguably already baked into the stock's price. So the risk of missing out on any upside from here outweighs the risk of further downside.
Perhaps the top reason to scoop up Ulta Beauty stock on this dip is simply that it doesn't reflect this company's unique strengths and competitive advantages.
Take its position within the retail landscape as an example. Other brands are similar to it in some ways. No other company does what Ulta does quite as well as Ulta does it, though. That is, offering a huge mix of value-oriented and premium products, as well as a wide range of skincare, cosmetics, and perfumes. It's a true one-stop shop.
It's also worth pointing out that while there are more than 1,250 Ulta Beaty stores up and running, the company operates an online store that's complementary-to rather than competitive-with its brick-and-mortar presence.
Moreover, the company understands the importance of repeat business, and has built a powerful loyalty/rewards program to generate it. Ulta's 44 million rewards program members (about two-thirds of the United States' 70 million "beauty enthusiasts" that are the retailer's target customer) account for 95% of the retailer's sales. This crowd may be tightening their purse strings a bit right now, but they'll certainly be back in store -- in numbers -- in the future.
And that future may be sooner than most investors anticipate in light of the glimmers of hope on the consumer-spending front. For perspective, June's U.S. retail sales were up 2.3% year over year, topping expectations and extending a long-standing trend. Last quarter's initial GDP growth estimate of 2.8% is also a far cry better than Q1's final reading of only 1.4%, suggesting the economy may be in better shape than recently feared.
In this same vein, the recession that was supposed to follow 2022's inversion of the so-called yield curve has yet to materialize. The yield curve is close to un-inverting, in fact, with no signs of a recession on the horizon. Maybe it's not coming after all.
Don't panic about the present, focus on the future
OK, Ulta Beauty may not the first and only growth stock you'd want to own. While there's no denying its value and the company's competitiveness, there's also no denying its potential pitfalls. Revenue growth is still apt to slow this year, causing full-year earnings to shrink. This could certainly rattle investors, even if only temporarily.
Take a step back and look at the bigger picture, though. Even the analysts who recently downgraded the stock still generally like it. They also collectively expect sales growth as well as earnings growth to bounce back next year. Indeed, the analyst community as a whole still says the stock's very undervalued. Their current consensus price target of $475.24? That's 30% above the stock's present price. One has to assume they're looking further down the road through a more level-headed lens than most investors are at this time.
James Brumley has 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 .
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