Ulta Beauty's stock is falling after earnings. Here's why some analysts say to buy the dip.

By Bill Peters

'We believe Ulta's scale and increasing technology investments put it in good standing looking further out,' analyst says

Shares of Ulta Beauty Inc. fell on Friday, a day after the beauty-products retailer forecast full-year profit that disappointed investors.

But analysts said the company was just being prudent. And they still found plenty to like about the stock, citing solid fourth-quarter trends - which were better than expected despite heightened competition - and the chain's efforts to become a bigger e-commerce outfit.

"As we telegraphed in our preview, we expected a conservative guidefrom the [Ulta] management team consistent with its typical practices," Oppenheimer analysts said in a note on Thursday, after Ulta reported results following the market close.

They added: "We would take advantage of weakness tomorrow. [Ulta] remains a top pick for us."

Similarly, D.A. Davidson analyst Michael Baker advised investors to "use any weakness as an entry point."

That hadn't happened as of afternoon trading on Friday. Shares were down 4.6%. The stock is up 4.7% over the past 12 months.

Ulta (ULTA) made its full-year forecast as its executives expect growth to ease in an otherwise healthy beauty industry and as the company invests in artificial intelligence, digital and delivery orders, and virtual product try-ons, and creates more space for digital advertising. The company plans to wrap up some of its investments this year.

But the beauty industry has gotten more competitive as rivals stock their shelves with more prestige makeup brands and continue to throw markdowns at consumers. More broadly, higher food prices have kept consumer spending on other things in check.

CFRA analyst Ana Garcia also said she expected a tempered outlook from the retail chain. But she said there were reasons to stay cautious as higher prices for basics keep consumer spending on other things in check, and as the company laps the boost it got from price increases last year and its investments pressure profit.

"We would not be surprised at potential conservativeness built into guidance given [Ulta's] record of beating estimates," she said in emailed commentary.

"Due to stretched consumer wallets, we think wrap-around pricing headwinds ... along with merchandise margin and [selling, general and administrative] investment headwinds, warrant caution," she added.

William Blair analyst Dylan Carden said Wall Street would likely take some issue with the company's full-year outlook, which assumes a bigger sales acceleration in the second half of the year. But he said pressure on the stock was "premature."

"For one, competition in the beauty industry has long been fierce, while we are more encouraged that for now at least it has not translated into more aggressive pricing activity," he said. "Instead, companies are competing more on ... broader engagement measures, where we believe Ulta's scale and increasing technology investments put it in good standing looking further out."

Baker, at D.A. Davidson, said that one source of competition for Ulta - Kohl's Corp.'s (KSS) efforts to lean into its in-store Sephora shops - "likely peaked" last year and would be less of a threat this year. However, Kohl's, which announced its partnership with Sephora in 2020, said this week that it plans to open more of those shops this year and next.

Moreover, UBS noted that the Ulta's current investment cycle was one of the biggest in its history.

They said margins could improve as the chain finishes up those investments and brings in more sales through new lines of business as a result. They also said Ulta's recent introduction of luxury selections from brands like Chanel and Dior would help upsell consumers.

"While competition in the prestige category remains intense, [Ulta's] recent luxury launch and its ability to convert mass customers up price points bodes well for its ability to gain back some share," they said. "Any evidence throughout 2024 that this is taking place would likely go a long way for shares."

-Bill Peters

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03-15-24 1442ET

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