Ulta Salon shares get price target adjustment from Canaccord, Buy rating stays intact

Tuesday, Canaccord Genuity adjusted its price target for Ulta Salon (NASDAQ: ULTA) shares from $522 to $500 while keeping a Buy rating on the stock. The revision comes as Ulta Beauty (NASDAQ:ULTA) prepares to announce its second-quarter results on Thursday, August 30, after the market closes. The firm's analyst cited the need to alter estimates in light of a continued normalization in U.S. beauty demand and a trend of increasing promotions, despite healthy demand.

The analyst noted that promotions are becoming more common between Ulta and its competitor Sephora, although they remain rational within the beauty sector compared to other more discretionary categories. The new price target reflects an approximate 18 times multiple of the firm's fiscal year 2025 earnings per share estimate. Despite the adjustment, the firm remains cautiously optimistic about Ulta's performance going into the earnings report.

The report is expected to show that the U.S. beauty market remains fairly healthy, with prestige beauty growing around 7% in the second quarter, albeit at a slower pace than the 9% growth in the first quarter.

Data from Circana indicated that mass beauty experienced low single-digit growth in the second quarter, similar to the first quarter. This growth was primarily driven by fragrance, with other categories like cosmetics remaining flat and hair and skin care products also seeing low single-digit increases.

Ulta, which operates in both mass and prestige categories, is anticipated to have sales growth that lags behind the robust prestige segment but outperforms the mass category.

The firm also expects Ulta to face some competitive pressure from Sephora's significant store expansion over the past three years, although this pressure is projected to decrease as Sephora approaches the limits of its expansion through the Kohl's (NYSE:KSS) partnership.

The firm's second-quarter comparable sales estimate aligns with the consensus at 1.4%. The analyst suggests that while year-over-year comparisons may be challenging, promotions have been kept rational. However, there has been an uptick in competition between Ulta and Sephora, particularly in the prestige market share, with both retailers increasing promotional activity.

In the upcoming earnings call, the firm will be looking for any updated guidance for the year, insights into demand for prestige versus mass brands, the new product pipeline, the level of promotional activity in the beauty business, and near-term margin expectations. The analyst expects gross margins to be down 43 basis points, slightly better than the Street's expectation of a 47 basis point decline.

In other recent news, ULTA Salon has seen significant analyst activity. Evercore ISI reduced ULTA's price target to $430 from $500 and removed the company from its 'Top 5 Outperformers' list, citing challenges such as a slowdown in the beauty category and competitive market pressures.

The firm also adjusted its second-quarter earnings per share estimate for ULTA to $5.43, down from $5.60, and reduced the full-year 2024 earnings forecast by 4% to $24.50.

Similarly, financial services firm Baird adjusted its outlook on ULTA, reducing the stock's price target to $485 due to mixed demand patterns and heightened market promotional activity. Citi also reduced its price target for ULTA from $400 to $375, citing weaker comparable store sales and lower gross margins.

In contrast, Berkshire Hathaway (NYSE:BRKa) disclosed new investments in Ulta Beauty, owning approximately 690,000 shares valued at $266.3 million, aligning with its diverse portfolio. Piper Sandler downgraded ULTA Salon's stock rating from Overweight to Neutral due to concerns about margin pressure, while Argus maintained its Buy rating and $485.00 price target for Ulta Beauty, highlighting the company's successful strategies in driving sales.

Lastly, Oppenheimer adjusted its price target for Ulta Salon shares to $450 from the previous $475, maintaining an Outperform rating.

InvestingPro Insights

As Ulta Beauty (NASDAQ: ULTA) gears up to release its second-quarter results, investors are closely watching the company's performance amid a competitive beauty market. InvestingPro data shows that Ulta has a market cap of approximately $17.89 billion, with a P/E ratio sitting at 14.6, which adjusts slightly to 14.23 when considering the last twelve months as of Q1 2023. Despite the competitive landscape, Ulta has managed a revenue growth of 7.64% over the last twelve months, indicating a resilient demand for its offerings.

An InvestingPro Tip highlights that management at Ulta has been actively buying back shares, which could signal confidence in the company's future prospects. However, it's worth noting that 8 analysts have revised their earnings downwards for the upcoming period, which could reflect concerns about market conditions or internal challenges.

The company's stock has experienced a significant decline over the last six months, with a 33.21% drop, yet it still trades at a high Price/Book multiple of 7.78. This could suggest that the market values Ulta's assets and brand despite recent price movements. Ulta is also noted to be profitable over the last twelve months and analysts predict profitability for this year as well.

For investors seeking more in-depth analysis, there are additional InvestingPro Tips available. These tips provide further insights into Ulta's financial health, such as its moderate level of debt and the fact that its liquid assets exceed short-term obligations.

As the earnings call approaches, these metrics and tips from InvestingPro may offer valuable context for understanding Ulta's current position and future potential in the dynamic beauty industry. For a deeper dive into Ulta's financials and additional tips, investors can visit https://www.investing.com/pro/ULTA.

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