Beauty and Cosmetics Retailers Ulta Beauty (NASDAQ: ULTA)The stock’s performance over the past six months has not been encouraging: Slowing growth and declining profit margins have sapped the stock price, causing it to fall from nearly $600 to below $400 in just the past six months.
Although there were reasons for the stock price decline, the stock market often overreacts. Ulta Beauty’s selling Too farAnd the stock is poised for a strong recovery. Here’s why Ulta Beauty is a compelling buy for investors right now.
Why did stock prices fall so much?
Beauty and cosmetics are cultural staples in the United States and around the world. Ulta Beauty is the largest cosmetics retailer in the United States with 1,395 stores and an e-commerce store. It sells tens of thousands of products from hundreds of brands. Ulta has also become a full-fledged brand and engages with customers through social media and loyalty programs.
In 2011, Ulta had just 449 stores. Steady new store openings have driven relatively uninterrupted sales growth for years, barring a pandemic that has devastated nearly every company with brick-and-mortar stores. Consistently profitable growth has made Ulta Beauty a market leader, and its stock price has soared. S&P 500 That’s roughly tripled since the company’s IPO in 2007.
Consumers were flush with cash coming out of the pandemic, which boosted Ulta’s business. But that tailwind has faded: Sales growth has steadily slowed since peaking in 2021, and gross margins are set to peak in the second half of 2022.
Executives point to increased theft and lower-margin sales as the causes of margin pressure. That makes sense, since consumer savings rates are below pre-pandemic levels. Naturally, retailers suffer as shoppers spend less and switch to cheaper brands. People may try to stick to their beauty regimes, but cosmetics are ultimately a discretionary budget item.
It’s not all bad
The good news is that Ulta Beauty’s recipe for success has worked for years, and there’s little reason to believe it will continue to do so in the future.
The company is still opening new stores and remodeling existing ones, and management expects to open 60 to 65 new stores and remodel an additional 40 to 45 stores in 2024. The new stores will increase store count by 4% to 5%, adding low single-digit underlying revenue growth to the business.
The remodeling and, eventually, a rebound in consumer demand should boost same-store sales, and analysts believe Ulta Beauty can average annual revenue growth of 5% to 6% over the long term.
Ulta Beauty’s declining margins aren’t necessarily a reason to panic. Gross margins, now at 38.9%, are still significantly higher than they were pre-pandemic, when Ulta’s margins were around 36%. The company’s free cash flow is still just shy of its decade-high, which should continue to fuel share buybacks. The company has reduced its share count by 26% over the past decade, which has helped its earnings per share growth.
Ultimately, investors need to determine whether Ulta Beauty can continue to grow long term, and there seems to be nothing here to suggest it can’t.
The sale went well.
The market has aggressively sold off Ulta Beauty shares in recent months, driving the stock price down. The company’s average price-to-earnings multiple over the past decade was 32 times. Currently, Ulta Beauty trades at just 15 times projected earnings for 2024. Less than half Long-term average rating.
It would be understandable if Ulta Beauty’s business had been seriously hurt, but as mentioned above, that doesn’t appear to be the case. Furthermore, analysts are optimistic, expecting the company’s revenue to grow at an average rate of over 12% per year over the long term.
There’s a famous adage that the stock market can be irrational at times. This adage applies both ways: stock prices can get significantly higher or lower depending on the whims of Wall Street. Ulta Beauty went out of fashion, and the market took advantage of a legitimate short-term slowdown to unfairly drive the stock price down.
The stock is a bargain at this price, making it an attractive buy for long-term investors willing to wait out these challenges.
Should I invest $1,000 in Ulta Beauty right now?
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool owns shares in and recommends Ulta Beauty. The Motley Fool has a disclosure policy.
These Market-Beating Stocks Are Great Stocks to Buy Now was originally published by The Motley Fool.
