Ulta Beauty stock has little upside, according to one Wall Street analyst.
The stock price was revised downward last week due to concerns that the recent growth slowdown could worsen.
Ulta Beauty (Ulta 1.08%) Share prices have recently underperformed the market, causing shareholders to worry about future returns. That’s understandable. The spa and beauty products retailer reported higher profits in its most recent quarter, but sales trends were disappointingly weak.
This bearish narrative may not improve, at least in the short term. Last week, an analyst Jeffries We lowered the company’s 12-month target price and downgraded the stock from a buy rating to a hold rating. Ulta Beauty could land at $438 per share at that time, meaning there is little upside from its current price of about $415 per share. The analyst’s previous target was $585 per share.
Why is Ulta inventory down?
Analysts note that the retailer faces some major headwinds. For one thing, the makeup category is slowing to a more normal rate of growth after surging post-pandemic. As downgrades occur, competition is also becoming fiercer.
I sympathize with those concerns. Last March, Ulta Beauty said comparable-store sales would grow just 2.5% to end 2023, and it forecast a 4% to 5% profit for fiscal 2024 (compared with a 6% profit last year). Customer traffic increased during the period, but consumers appeared to be more cautious with their spending patterns.
Ulta has also had to cut prices in response to competitive promotions, which has reduced profit margins. The company’s profits fell from 16% to 15% of sales last year, and management expects them to decline again in 2024.
Where is Ulta headed?
The good news is that Ulta’s earnings power is still well ahead of where it was before the pandemic. And Ulta is still taking market share even though industry growth is slowing. Shoppers continue to engage with your company both in stores and online, so you don’t risk losing much ground to the competition.
Nonetheless, investors should brace for additional weak earnings reports as we move deeper into 2024. While this isn’t a reason to sell the retailer’s stock, Ulta’s tough operating environment will likely weigh on its sales and earnings potential in the near term.
