Sentiment toward Ulta Beauty (NASDAQ:ULTA) has turned overly negative, resulting in its share trading near trough valuation levels, analysts at Jefferies said as they maintained a ‘Buy’ recommendation on the stock.
While reducing their price target for Ulta to $518 from $580, the analysts noted that level still presents a 27% upside to its current share price of just below $410, which discounts fears around margin deleverage from shrink, investments, and promos.
However, underlying industry data remains robust with prestige beauty tracking in the positive double digits, led by makeup, which accounts for 40-50% of sales.
Ahead of the company’s third-quarter results on November 30, the analysts said Ulta’s foot traffic data was strong, rising 7% through the quarter and outpacing beauty retail peers Sally Beauty Holdings and Bath & Body Works, which both had negative trends for the same quarter.
Based on data from consumer insights organization Circana, the analysts estimated that sales of prestige makeup were up mid-teens in 3Q, followed by skin and fragrance in the low double digits.
“We continue to see innovation and newness in makeup, which has historically been the top contributor to ULTA's comp growth (makeup = ~45% of sales), the analysts wrote.
“Additionally, promo commentary from beauty vendors and other retailers has been positive. Promo levels have normalized, but are not elevated.”
Shrink concerns have also been overblown, the analysts said, viewing better-than-expected shrink impact at Target Corporation as a positive readthrough to Ulta given its shop-in-shop presence in more than 400 Target stores, where it has also enhanced security measures, such as reduced entry/exit points and cameras.
“Though we are seeing some trade-down in select categories (e.g. skin & fragrance), engagement with the beauty category remains strong,” the analysts said.
“We continue to view Ulta as well positioned in an environment where consumers are looking to shop across price points.”
Ulta’s shares were up 0.9% at $409.09 in early Wednesday afternoon trade in New York.
Contact the author at stephen.gunnion@proactiveinvestors.com