We came across a bullish thesis on Ulta Beauty, Inc. (ULTA) on Capitalist Letters’ Substack by Oguz Erkan. In this article we will summarize the bulls’ thesis on ULTA. Ulta Beauty, Inc. share was trading at $373.08 as of Sept 12th.
A female customer shopping for beauty products in a modern store.
Ulta Beauty recently missed earnings expectations, posting revenue of $2.55 billion versus $2.61 billion expected, and earnings per share of $5.30 compared to $5.46 expected. This marked the first time in four years that Ulta failed to meet both top and bottom-line estimates, which seems to have prompted an exaggerated market reaction. Given the macroeconomic backdrop—high inflation, rapid interest rate hikes, and slowing consumer spending—Ulta’s performance has actually been quite resilient. Over the last five years, the company has achieved an impressive 17% annual earnings growth and maintained a median return on equity (ROE) of 35% over the past decade, reflecting its strong operational efficiency and market leadership.
Despite the earnings miss, Ulta remains well-positioned within the beauty sector, a relatively defensive segment of the consumer market. Beauty products are less susceptible to economic downturns, as cosmetics are often viewed as a non-negotiable expense for many consumers. This was evident in Ulta’s results: despite the challenging economic conditions, the company still reported a 0.9% year-over-year increase in net sales for the second quarter and a 2.2% rise in net sales for the first half of 2024. While growth rates have slowed, demand remains robust, bolstered by the sector’s resilience.
Competition from Sephora and Elf has intensified, contributing to a 1.2% decline in same-store sales and Ulta’s lowest quarterly gross margin since 2020. However, this margin pressure does not suggest a loss to competitors; rather, it represents a temporary challenge amid a tough market environment. Ulta continues to expand, adding a net 60 stores this year and planning to enter the Mexican market in 2025, demonstrating confidence in its growth prospects.
Ulta also remains a compelling investment due to its aggressive share buyback strategy. The company repurchased 1.1 million shares in the first half of 2024, with $1.6 billion remaining under its current $2.0 billion buyback authorization. This could enable Ulta to repurchase around 10% of its outstanding shares at the current valuation, further supporting the stock price and enhancing shareholder value.
Even with recent downgrades in growth estimates, Ulta still trades at a low multiple of 13 times earnings. Assuming a conservative 6% annual revenue growth over the next five years, Ulta could reach $15.1 billion in revenue by FY 2029. Applying a modest 11% profit margin and accounting for continued share buybacks, this would result in $39 earnings per share by 2029. Assigning a 20x earnings multiple, justified by consistent growth and share repurchases, yields a price target of $780 per share, offering a potential 17% annual return.
In summary, despite the recent earnings miss, nothing fundamental has changed in Ulta’s investment case. The company’s strong market position, consistent earnings, and strategic initiatives make it an attractive opportunity for long-term investors looking for resilient growth with significant upside potential.
Ulta Beauty, Inc. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 46 hedge fund portfolios held ULTA at the end of the second quarter which was 52 in the previous quarter. While we acknowledge the risk and potential of ULTA as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. 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 was originally published at Insider Monkey.
