In a year laced with macroeconomic and geopolitical headwinds, the stock market has faced a broad-based sell-off. However, beauty retailer Ulta Beauty, Inc. (ULTA) has survived the market correction well and gained 2.3% in price year-to-date to close the last trading session at $422. The stock has returned 5.2% over the past month.

ULTA beat analyst estimates in the last reported quarter. Its EPS beat the consensus estimate by 14.3%, while its revenue came in 4.2% higher than estimates. It has surpassed consensus EPS estimates in each of the trailing four quarters.

The company has updated its outlook for the fiscal year 2022, with net sales expected to come from $9.65 billion to $9.75 billion, up from $9.35 billion to $9.55 billion. Its operating margin is expected to go between 14.6% to 14.8%, up from the previously estimated 14.1% to 14.4%.

In addition, its EPS estimates for this year have also been raised from the previously estimated $19.20-$20.10 to $20.70-$21.20. The company added seven new stores in the previous quarter, taking the total store tally to 1,325.

The stock market worries about a recession by the end of this year as inflation rages on and the Fed continues its rate hikes. According to many experts, the beauty industry is one of those industries that should remain largely unaffected by a recession.

ULTA could benefit from what is commonly known as the lipstick effect. During an economic downturn, despite the decline in consumer sentiment, consumers tend to spend money on small luxury items such as premium lipsticks rather than splurging on expensive discretionary items. Beauty companies are among those which benefit from this lipstick effect and have been historically more resilient during an economic downturn.

Here’s what could influence ULTA’s performance in the upcoming months.

Robust Financials

ULTA’s net sales increased 16.7% year-over-year to $2.29 billion for the second quarter ended July 30, 2022. The company’s gross profit increased 16.3% year-over-year to $928.16 million. Its net income increased 17.8% year-over-year to $295.67 million. Also, its EPS came in at $5.70, representing an increase of 25% year-over-year.

Revenue and EPS Growth Estimates

Analysts expect ULTA’s EPS for fiscal 2023 and 2024 to increase 18.5% and 8.1% year-over-year to $21.31 and $23.03. In addition, its revenue for fiscal 2023 and 2024 is expected to grow 13% and 6.9% year-over-year to $9.76 billion and $10.43 billion.

Stretched Valuation

In terms of forward EV/S, ULTA’s 2.35x is 117.3% higher than the 1.08x industry average. Likewise, its 2.22x forward P/S is 163.7% higher than the 0.84x industry average. Its 13.34x EV/EBITDA is 56.6% higher than the 8.52x industry average.

Higher-than-industry Profitability

In terms of the trailing-12-month gross profit margin, ULTA’s 43.50% is 19.6% higher than the 36.35% industry average. Likewise, its 18.54% trailing-12-month EBITDA margin is 66.4% higher than the industry average of 11.14%. Furthermore, the stock’s 15.85% trailing-12-month EBIT margin is 95.1% higher than the industry average of 8.12%.

POWR Ratings Reflect Uncertainty

ULTA has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. ULTA has a D grade for Value, consistent with its stretched valuation.

It has an A grade for Quality, in sync with its high profitability. Its 1.35 beta justifies its C grade for Stability.

ULTA is ranked #15 out of 45 stocks in the Specialty Retailers industry. Click here to access ULTA’s Growth, Momentum, and Sentiment ratings.

Bottom Line

ULTA is currently trading above its 50-day and 200-day moving averages of $408.93 and $392.88, indicating an uptrend. Despite the uncertain macroeconomic environment, the company managed to beat its EPS and revenue estimates by a significant margin. Moreover, ULTA has raised its outlook for this year, indicating business resilience even amid a slowing economy.

Its robust financials, high profitability, and favorable analyst estimates make it an attractive investment prospect. However, given its stretched valuation, it could be wise to wait for a better entry point in the stock.

How Does Ulta Beauty, Inc. (ULTA) Stack Up Against its Peers?

While ULTA has an overall POWR Rating of C, you might want to consider investing in the following Specialty Retailers stocks with an A (Strong Buy) or B (Buy) rating: TravelCenters of America Inc. (TA), Murphy USA Inc. (MUSA), and Pan Pacific International Holdings Corporation (DQJCY).

ULTA shares fell $8.99 (-2.13%) in premarket trading Wednesday. Year-to-date, ULTA has gained 2.34%, versus a -18.10% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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