We recently published a list of 12 Best Beauty Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where Ulta Beauty, Inc. (NASDAQ:ULTA) stands against other best beauty stocks to buy according to hedge funds.
According to a report by McKinsey, in 2023, the global beauty market expanded by 10%, reaching $446 billion in retail sales, mostly due to price hikes rather than volume advances. North America and Europe grew steadily, but the Middle East & Africa (18%) and Latin America (17%) grew at the quickest rates, with China trailing behind at 3% because of poor consumer sentiment. The market is expected to reach $590 billion by 2028 at a compound annual growth rate (CAGR) of 6%, with growing markets and Asia-Pacific driving development. Skincare (44% of the market) had stable growth, while fragrance (14%) was the category with the quickest rate of growth, driven by luxury niche brands. Beauty businesses must employ premiumization, innovation, and skin care-infused cosmetics to transition from price-driven to volume-driven growth to maintain momentum, especially in high-growing markets like the Middle East and India.
A significant contributor to the American economy, the beauty industry generated $94.36 billion in sales in 2023 and employed 4.6 million people in manufacturing, retail, and distribution. Costs increased by 6.5% due to inflation, which affected customer spending patterns and raised demand for reasonably priced “dupes.” In 2023, e-commerce beauty sales reached $21.3 billion, a reflection of changing consumer preferences. Despite economic downturns, consumers continue to make little luxury purchases, a phenomenon known as the “lipstick effect.” Private equity investors show their confidence in the potential of the beauty industry by continuing to invest in scalable beauty brands. Disruptions in the supply chain have pushed up near-shoring initiatives, which have helped create jobs in the United States. DC Advisory states that “the beauty sector’s adaptability ensures long-term relevance and economic impact.”
Recently, as the holiday season approached, the U.S. beauty business was still doing well, with mass market sales up 2% year over year and the prestige market expanding 7% to $22.8 billion, according to Circana. Lipcare sales increased 21% in dollars and 23% in units, due to high demand for tinted balms and oils. As a result of consumers’ price sensitivity, mid-range skincare brands are expanding six times faster than luxury skincare. Sales of fragrances surged 14%, with premium brands up 15%, while prestige hair care climbed 8%, driven by style and scalp care items. According to 29% of customers, the Christmas season is a critical time to purchase beauty presents. Larissa Jensen, global beauty industry advisor at Circana stated:
“Prestige beauty epitomizes the indulgence in little luxuries and acts as an indicator of the consumer mindset for the beauty industry overall,” “This holiday season, its resiliency will be tested. There has been some pullback in spending throughout 2024, but big increases in prestige beauty spend from higher-income households with children under 18-years-old indicate parents are indulging Gen Alpha with these products. The social media virality of this new generation of beauty enthusiasts shows no sign of slowing and could be a pivotal holiday growth driver.”
The increasing integration of artificial intelligence (AI) appears to have affected every business, and the beauty industry is no different. AI is already changing the way beauty brands function, and its impact is only going to increase. According to a survey by Perfect Corp., 77% of experts in the beauty industry think that conversational AI agents—like chatbots and virtual assistants—offer unparalleled possibilities for customizing encounters. These tools enable accurate answers to questions, individualized product recommendations, and immediate, round-the-clock customer support.
A photograph of a customer testing out different products in the skincare aisle at a store.
Methodology
We sifted through holdings of beauty ETFs and online rankings to form an initial list of 20 beauty stocks. From the resultant dataset, we chose 12 stocks with the highest number of hedge fund investors, using Insider Monkey’s database of 900 hedge funds in Q3 2024 to gauge hedge fund sentiment for stocks. We have used the stock’s Revenue Growth Rate (year-over-year) as a tie-breaker in case two or more stocks have the same number of hedge funds invested.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
Ulta Beauty, Inc. (NASDAQ:ULTA)
Number of Hedge Fund Holders: 40
Revenue Growth Rate (year-over-year): 9.78%
Ulta Beauty, Inc. (NASDAQ:ULTA) presents an exceptional chance in the cosmetics industry. The company sells beauty items through stores located in strip malls across the country. The company has an advantage over other brick-and-mortar retailers and other beauty retailers like Sephora because of its hair salons, which also help draw customers into the stores.
Over the years, the company has consistently increased comparable sales and its stock has consistently performed well. However, 2024 was a difficult year for the company since it had to deal with competition from mass-market retailers like Kohl’s and CVS. In order to expand its business, Ulta Beauty, Inc. (NASDAQ:ULTA) also signed a contract with Target to open 100 stores inside Target locations over the coming years. It continues to benefit from many competitive advantages, such as its superstore retail model, reward program, extensive variety, and hair salons, despite its recent challenges.
The third-quarter fiscal 2024 net sales of Ulta Beauty (NASDAQ:ULTA) were $2.53 billion, up 1.7% year over year, mostly due to the opening of new stores, however, this was partly offset by a drop in other revenue. A 0.1% increase in average ticket size and a 0.5% increase in transactions led to a 0.6% growth in comparable sales. Even with increased SG&A costs, operating income was $318.5 million, or 12.6% of net sales. Diluted EPS increased from $5.07 to $5.14, while net income hit $242.2 million.
New store contributions and other revenue growth generated a 2% increase in net sales to $7.8 billion for the first nine months. The company displayed confidence in its long-term growth strategy by continuing to expand, adding 57 new stores in 2024, and repurchasing $764.5 million worth of shares. Ulta Beauty, Inc. (NASDAQ:ULTA) appears to be on track for more expansion, given the company’s unique business model.
Ken Griffin’s Citadel Investment Group was the largest stakeholder in the company among the funds in Insider Monkey’s database at the end of Q3 2024. It owns 623,500 shares worth $242.62 million as of Q3.
Overall, ULTA ranks 7th on our list of best beauty stocks to buy according to hedge funds. While we acknowledge the potential for ULTA to grow, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than ULTA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.