Ulta Beauty (ULTA) stays strong after beating challenges. Is the stock a buy?

Of late, there has been a steady increase in spending on beauty and self-care products, amid growing awareness about the importance of health and wellness. Consumers’ continued engagement in that area, even when the economic slowdown necessitated a reduction in discretionary spending, enabled wellness companies like Ulta Beauty, Inc. (NASDAQ: ULTA) to effectively navigate the virus-induced crisis.

The Bolingbrook-based beauty products retailer’s stock is one of the least affected by the market downturn this year — it regained strength after every fall and mostly outperformed the broad market. Interestingly, the stock reached a record high a few months ago despite high volatility, and stayed near the peak since then.

Stable Stock

The underlying strength of Ulta Beauty and positive outlook on the business justify the relatively high valuation. ULTA is unlikely to get cheaper in the near future but the stock will not disappoint investors who go for it now. The consensus estimate is for continued gains in the coming months, which would raise the stock close to $500.

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Ulta Beauty Q2 2022 Earnings Call Transcript

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The beauty division has remained surprisingly resilient to market headwinds and gained further momentum in recent months reflecting the relaxation of COVID restrictions and improvement in consumer sentiment. The company’s leadership is optimistic about future performance and recently raised its full-year guidance for net sales, comparable sales, and margins.

Growth Model

At the core of the management’s growth strategy is continued investment in the business — thanks to the strong liquidity position — with focus on ramping up the digital channel through the adoption of advanced technologies like artificial intelligence. In the long term, meanwhile, the bottom line is likely to come under pressure from moderation in merchandise margins and higher logistics and other costs, reflecting elevated inflation.   

From Ulta Beauty’s Q2 2022 earnings conference call:

“We engage and delight beauty enthusiasts with a curated differentiated assortment focused on inclusivity and leading trends. And this approach continues to deliver results. From a category perspective fragrance and bath, skincare, hair care, and makeup all exceeded expectations, delivering double-digit comp growth against the second quarter of last year. We are encouraged that the vast majority of our comparable sales growth was fueled by growth from both core and newness with a modest benefit from recently executed price increases.”

Strong Sales

Currently, the company is thriving on the positive momentum seen across all areas of the business, mainly due to stable customer demand. In the most recent quarter, both sales and earnings benefitted from double-digit growth in comparable-store sales. Average ticket moved up around 6% in the second quarter, benefiting from an improvement in selling prices. That, together with an 8% increase in transactions, pushed up same-store sales by 14.4%.

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Consequently, total sales climbed 17% annually to $2.3 billion, exceeding consensus estimates. Net profit moved up 25% to $5.70 per share, which also came in above the forecast. The continued strength of beauty and skincare divisions and shift of demand towards premium makeup products added to the growth.

ULTA has mostly stayed above its 52-week average so far this year, though it experienced weakness at times. The present price is broadly unchanged from the value seen at the beginning of the year. The stock traded higher on Monday afternoon.