Mixed Earnings Trend Could Pull Ulta Beauty Stock Down To $300

Ulta Beauty Inc. stock (NASDAQ: ULTA) is up more than 20% since the beginning of this year, and at the current price of $341 per share, we believe that Ulta Beauty stock has over 10% potential downside.

Why is that? Our belief stems from the fact that Ulta Beauty stock is up more than 1.5x since 2017 end, and after a mixed recent earnings trend, we believe Ulta Beauty stock could head lower. Our dashboard What Factors Drove 52% Change In Ulta Beauty Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Ulta Beauty is an American chain of beauty stores, whose stock price rise since 2017 came due to an 18% increase in revenues from $5.88 billion in FY 2017 to $6.92 billion over the last 4 quarters (Ulta’s fiscal year ends in January). Combined with a 9% drop in the outstanding share count, RPS (revenue per share) jumped from $95.60 in FY 2017 to $124.10 on an LTM basis.

Further, Ulta’s P/S (price-to-sales) ratio jumped from 2.1x in 2017 to 2.6x by 2020 end, and has since risen marginally to 2.7x currently. We believe that given Ulta’s mixed recent earnings performance, there is a possible downside risk for the P/S multiple.

So what’s the likely trigger and timing to this downside?

The global spread of coronavirus and the resulting lockdowns meant that there was a drop in demand for makeup and fragrance products as people were just not stepping out as often. However, with economies opening up and people starting to get out of their houses, demand for cosmetic products and fragrances has spiked. This is evident from Ulta’s Q1 2022 earnings, where revenue came in at $1.94 billion, up strongly from $1.17 billion for the same period in FY ’21. Shrewd expense management saw Ulta’s operating income come in at $305 million, a sharp turnaround from the $101 million operating loss in Q1 2021. This saw EPS rise to $4.13 from -$1.39 over this period.

However, it’s important to note that revenues in FY 2021 (at $6.15 billion) look weak when compared to those in FY 2020, which came in at $7.4 billion, and even when compared to the $6.72 billion in FY 2019. Despite demand and revenues rising YoY in Q1 2022, given Ulta’s overall revenue and earnings trend since FY 2019, combined with the continuing work from home trend, we believe that the company does not warrant such a high P/S multiple. While Ulta’s upcoming Q2 2022 earnings will paint a clearer picture, we believe that in the near term the stock will see its P/S multiple decline from the current level of 2.7x to 2.3x, which despite being supported by a slight increase in revenues and margins, could result in the stock price shrinking to as low as $300, a downside of more than 10% from the current price near $341.

While Ulta Beauty Inc. stock may move lower, it is helpful to know how its peers stack up. Ulta Beauty Inc. Comparison With Peers summarizes how Ulta Beauty compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

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