Ulta Beauty's stock turns positive for the year as analysts really liked their earnings

By Ciara Linnane

Ulta's stock rose 11.7% Friday to put it on track for its biggest one-day percentage gain in more than a year

Ulta Beauty Inc.'s stock rose 11.7% Friday to put it on track for its biggest one-day percentage gain in more than a year, as analysts weighed in with bullish takes on the company's better-than-expected third-quarter earnings.

The last time the stock (ULTA) gained that much was May 27, 2022, when it rose 12.5%, according to Dow Jones Market Data. The stock has gained for seven straight days, chalking up a 17.5% gain in the period and has turned positive for the year.

Ulta beat third-quarter consensus estimates for profit, sales and same-store sales and tightened its guidance by raising the low end of the range, a move typically viewed as bullish. The retailer said traffic trends were healthy and it expanded its loyalty program to 42.2 million members.

Raymond James reiterated its strong buy rating on Ulta's stock and $500 price target, which is about 6% above the current price.

The beat was a positive surprise as investors were concerned about a margin miss and risk of lowered guidance heading into the release of the numbers, said analyst Olivia Tong.

"Gross margin declined 130 basis points year-over-year while operating margin was -230bp y/y, with gross margin better than expected due to higher other income (which includes credit card income and Target royalty fees), shrink that stayed stable, and greater fixed cost leverage due to the sales beat, offset by investments in digital and supply chain," Tong wrote in a note to clients.

Shrink refers to lost items either because of error or theft. Retailers have complained a lot this year about organized gangs targeting stores.

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Other positives are that the cost base now accounts for the higher impact of shrink, that three quarters of the company's network of stores have been updated with new fragrance fixtures to deter theft, and investments in digital store infrastructure and enterprise resource planning systems that started in fiscal 2023 should be completed next year, she said.

D.A. Davidson reiterated its buy rating on the stock, and said the report ticked all the boxes. Ulta has been one of the more controversial names in its coverage space this year, wrote analysts led by Michael Baker.

"The bears had been winning with the stock down 9.2% versus the SPDR S&P 500 Retail exchange-traded fund XRT up 6.9% and the equal weighted S&P 500 up 4.6%, said Baker. "But, we think the third-quarter results, call and call back did a lot to ease investor concerns ona number of topics, which should lead to a relief rally for the share."

See: Est?e Lauder's stock plunges toward a 6-year low after profit outlook falls well below forecasts

At Oppenheimer, analysts led by Rupesh Parikh recommended taking advantage of continued volatile trade from here, predicting that gains may fade.

Ulta remains a top pick for Oppenheimer, which has an outperform rating on the stock, the equivalent of buy.

The stock is also a top pick at TD Cowen, among analysts led by Oliver Chen.

"Going forward, we believe Ulta needs to increase cross-category customer purchasing trends and accelerate digital marketing investments, which are essential to productivity, margins, and inventory and product execution," said Chen.

Otherwise, the company could lose share to rival Sephora, a unit of LVMH Mo?t Hennessy Louis Vuitton (FR:MC), which has a younger customer and more premium appeal, he said.

The stock is up 0.5% in the year to date, while the S&P 500 has gained 19%.

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-Ciara Linnane

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12-01-23 1333ET

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