Ulta Beauty's Big Comeback — Will It Last?

This year, the holiday season came early for Ulta Beauty's stockholders, as store traffic returned to normal, boosting the company's top and bottom lines.

Last Thursday, the salon, cosmetics and fragrance company delivered solid third-quarter financial results. Net sales were $2.5 billion, up from $2.3 billion a year ago. In addition, comparable store sales rose 4.5%, with net income reaching $249.5 million or $5.07 per diluted share.

Ulta Beauty CEO Dave Kimbell credited the company's performance to its proper positioning in the beauty product category, promising better days ahead for stockholders.

"The third quarter represented another strong performance by the Ulta Beauty team, as sales, gross profit, and diluted EPS all exceeded our internal expectations. Our traffic trends remained healthy, our brand awareness increased, and we expanded our loyalty program to a record 42.2 million members," Kimbell said following the release of the company's financial results. "As we look to the future, the outlook for the Beauty category is bright, and I am confident Ulta Beauty has the right plans to delight our guests this holiday season, expand our leadership position in specialty beauty retail, and deliver long-term shareholder growth."

Lila Margalit of Placer.ai thinks Ulta is in the right place at the right time with a suitable value proposition.

"Retail in 2023 is all about enjoyable experiences, affordable indulgences, and self-care," she wrote in a blog post. "And Ulta Beauty, which embodies each of these trends, seems to have been created with the current moment in mind."

Wall Street was pleased with Ulta's financial results, sending its shares 11% higher Friday to $474 per share.

That's a big comeback from the pandemic days in the spring of 2020 when the company's shares traded at $150 per share, but still below its intrinsic value, which Gurufocus.com places at $567 per share.

In addition, Gurufocus.com calculates Ulta's economic profit (EP) — a measure of how effectively management allocates capital to profitable opportunities — to be 24%. A positive EV indicates that the company manages other people's money effectively — it invests the money in business opportunities that yield a higher return (ROIC) than the cost of capital (WACC).

A low valuation and a high EP suggest that Ulta's comeback is for real, with better days ahead for its stockholders.

Margalit thinks Ulta has a bright future, riding a favorable consumer trend: self-care and wellness.

"From therapy to protein bars, consumers of all ages continue to prioritize self-care and wellness," she wrote. "And Ulta, which offers customers the perfect way to treat themselves with fun products that also make them feel good, is riding the wave."

John Zolidis of Quo Vadis Capital, a long-term follower of Ulta, thinks Uta is the long-term winner in beauty retail. But he believes the company's business is decelerating, with some critical metrics turning negative.

"Further, as we look into FY24, it seems reasonable to believe in modest comps, with some ongoing profitability headwinds," Zolidis added. "The Street's MSD EPS growth estimate seems within a likely range of outcomes."

Furthermore, he said Ulta sales per square foot are tracking >35% above pre-pandemic levels (FY19) with muted promotional levels and will see significant earnings reset once sales promotions normalize.

"Note that makeup (Ulta's largest category) compared negatively in the quarter, which may be a sign that promotions will increase," Zolidis added.

While he still considers Ulta a fantastic retailer, he hypothesizes the best unit growth days are behind it, and earnings growth will be modest next year.

"We believe valuation at current levels reflects this balance, and we'd be more inclined to sell the pre-market move (+11%) than chase it," he noted.

Panos Mourdoukoutas has no position in Ulta Beauty.