Ulta Beauty Earnings: Investors Have Concerns Despite Solid Start to 2023; Shares Expensive

Ulta Beauty recorded mixed results in 2023’s first quarter as its 9.3% same-store sales growth eclipsed our 7% estimate, but elevated costs affected its profitability and there are signs that consumer spending on beauty is moderating after two very strong years. The firm held its full-year same-store sales guidance of 4%-5% (against a tough comparison), but slightly lowered its operating margin guidance (to 14.5%-14.8% from 14.7%-15.0%). We do not expect to make any material change to our $364 per share fair value estimate and continue to view shares as overvalued, even after sliding 8% in postmarket trading. While we rate Ulta as a narrow-moat firm that can continue to draw shoppers away from traditional beauty sellers, we also consider the competitiveness of its space, the discretionary nature of its products, and its reliance on beauty manufacturers in our valuation. Indeed, the firm reports that some competitors are resorting to higher discounts in response to slowing demand, and there is some indication that consumers are choosing lower-priced mass beauty products over prestige products.