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

Ulta Beauty ULTA 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.

Taking a closer look at costs, Ulta’s first-quarter selling, general, and administrative expenses increased 22% from last year, reaching 23.2% of sales. While there were some unusual circumstances, including delayed spending in the first half of 2022, the firm does face higher wage and store costs. Some of these investments may improve the customer experience and elevate sales and margins, but others are in response to greater competition, inflation, and rising incidents of theft. Ulta’s operating margin was 16.8% in the quarter, down from (a very high) 18.7% last year and 120 basis points below our forecast.

Ulta reported $6.88 in EPS in the quarter, $0.08 below our forecast. Moreover, the shortfall would have been about $0.15 greater if not for an unusually low 22.8% tax rate that was attributable to the timing of compensation.