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Ulta Beauty Fades as Growth Story Seen Showing Cracks

Competition from elsewhere, including from LVMH's Sephora and Macy's Bluemercury, has limited much of Ulta's growth.
Ulta Beauty | Source: Shutterstock
By
  • Reuters

BOLINGBROOK, United States — Ulta Beauty Inc shares dipped 9 percent on Friday after the cosmetics retailer gave a disappointing earnings forecast for the crucial holiday selling season, bruised by higher discounts and mounting competition.

At least six Wall Street brokerages cut their price targets on Ulta's stock, highlighting the company's eroding profit margins and its failure to grow market share faster.

One analyst noted that the once high-flying retailer, whose sales and stock price have tripled in the last five years, has not raised its annual earnings forecast this fiscal year — a first since 2014.

Ulta's profit margins declined by almost one percentage point to 36.7 percent in its latest fiscal quarter. That was partly due to the impact of the recent U.S. hurricanes but also because the retailer was forced to slash prices to attract shoppers in the face of little innovation in its colour cosmetics category.

"It's hard to ignore the fact that the story continues to show some cracks," analysts at Wells Fargo said.

Ulta grew rapidly from being a little-known beauty retailer in 2012 to become a bright spot in a U.S. retail industry burdened by brutal competition from e-commerce platforms including Amazon.com Inc.

The company used a strategy of offering deals on everything from mass-market cosmetics to high-end brands and gained an edge over Amazon by allowing shoppers to try before they buy.

But competition from elsewhere, including from LVMH's Sephora and Macy's Bluemercury, has limited much of Ulta's growth.

"Further market share gains become harder to come by given increased competition and the slowing beauty market," BMO Capital analyst Shannon Coyne said.

Still, analysts maintain that Ulta's fundamentals are intact.

"On the one hand, the company continues to post industry-leading (comparable sales and earnings per share) growth; on the other, items like pressured (gross margins) and a below-Street guide are adding fuel to the bears' fire," Nomura analyst Simeon Siegel said.

Ulta has topped Wall Street estimates for comparable sales for four consecutive years. But its Thursday earnings forecast for the holiday quarter of $2.73 to $2.78 per share lagged analysts' average expectation of $2.84.

Ulta's shares are over-valued and trade at 26.5 times forward earnings, Thomson Reuters data shows, compared with the specialty retail industry average of 25.1 times and rival Sally Beauty's multiple of 9.

But analysts believe Ulta is valued fairly, thanks to its potential as an acquisition target for companies including Amazon, Estee Lauder and L'Oreal.

By Gayathree Ganesan; editor: Sai Sachin Ravikumar.

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