Mixed views about Ulta Beauty ahead of Analyst Day and category growth slowdown

Wall Street is divided over Ulta Beauty’s long-term outlook ahead of the retailer’s Analyst Day, held every three years. Next week’s event in Chicago, Illinois, US, is expected to address industry trends, online engagement and store operations amid mixed opinions about the company’s lackluster stock performance so far this year.

Deutsche Bank slightly dropped its 12-month share price target by two dollars to US$424, but analysts from TD Cowen are more pessimistic. Last week, they lowered their stock price target by five dollars to US$390 amid concerns about tighter profit margins in the face of increasing competition. That followed a decision two weeks ago to downgrade their rating from a “buy” to a “hold.” 

B. Riley is even more bearish on the stock, initiating coverage with a “sell” rating and a much lower price target of US$300. Its analysts are concerned about the possibility of weaker earnings. On Wednesday, the stock closed at US$359.80 on the Nasdaq market in New York. 

Ulta Beauty optimism

Investment firm DA Davidson believes Analyst Day could mark a shift for the company and help the stock gain momentum. 

This week, Michael Baker maintained a “buy” rating with a price target of US$435. The analyst looks forward to getting more “comprehensive updates” about Ulta Beauty’s operations and the overall sector at the event on October 16.

UBS also sees encouraging signs and says that despite recent challenges such as a slowdown in category growth and heightened competition, the event can serve as an opportunity to “reset” and share “more achievable expectations” with investors.

Analysts await Ulta Beauty update on growth plan and outlook for beauty sector.It anticipates a formula with a target of mid-single-digit to high-single-digit earnings per share growth. UBS believes this could spark investor confidence as many are wary of Ulta Beauty’s competition from companies such as Sephora, which has expanded into Kohl’s department stores throughout the US.

Buffett boost

The stock enjoyed a decent boost after a regulatory filing in August revealed that legendary investor Warren Buffett’s conglomerate Berkshire Hathaway purchased about 690 thousand shares of the cosmetic brand in the second quarter, with a value of about US$266 million. 

Soon after, Ulta Beauty reported second-quarter earnings that fell short of Wall Street’s quarterly performance estimates. The company cited growing market competition from the diversifying omnichannel playing field, particularly for premium beauty. The quarter marked the first time Ulta Beauty missed analysts’ expectations in four years. It also trimmed forward guidance after reporting a quarterly sales decline.

Targeting Gen Z

Ulta Beauty and its competitors are on a mission to attract Gen Z consumers as the demographic carves out a distinct niche in beauty.  

Innova Market Insights data reveals that 52% of Gen Z consumers are willing to try new makeup products, highlighting them as key trendsetters in the global beauty market. According to consumer insights research from Ulta Beauty, pre-teens are considerably tuned in to brand activities.

This week, pop star Ariana Grande visited the Ulta Beauty store in Manhattan’s Herald Square to promote her REM Beauty brand, which is part of a new collection at the retailer.  

Personal Care Insights recently discussed makeup trends with Spate whose research indicates retailers and manufacturers may have to come up with more creative, multifunctional ways to market products.