Wall Street is eagerly awaiting Ulta Beauty’s upcoming earnings report, which is set to be released on Thursday. The report will shed light on how the popular cosmetics retailer is navigating the current challenging economic climate.
In a recent research note, Citi analyst Kelly Crago expressed caution about Ulta Beauty’s stock (ticker: ULTA) and lowered her price target from $475 to $440. While maintaining a Neutral rating, Crago warned that there could be news in the earnings report that may negatively impact the stock.
Ulta Beauty’s shares closed at $413.52 on Monday, experiencing a slight decline of 0.2%. Since its inclusion as a top pick in February, the stock has fallen by nearly 12% this year, in contrast to the S&P 500’s gain of almost 19%.
Crago anticipates that Ulta Beauty’s management will revise down their guidance for Fiscal Year 2023 (F23), adopting a more cautious approach due to several factors. These include slowing trends in the cosmetics category, an increase in promotional activities, and ongoing concerns related to theft and other inventory losses. Looking ahead to Fiscal Year 2024 (F24), Crago believes that these challenges will persist, prompting a more conservative outlook for the company.
Ulta Beauty did not provide an immediate response when requested for comment.
The term “shrink headwinds” refers to the negative impact of theft and other forms of inventory loss on a retailer’s bottom line. Several retailers have recently reported an increase in shoplifting incidents, which further erode profit margins.
Ulta’s Efforts to Address Shrink Still Challenging
Ulta Beauty’s Chief Financial Officer, Scott Settersten, recently discussed the ongoing issue of shrink during the company’s second-quarter earnings call in August. While their efforts to combat the problem have made some impact, Settersten acknowledged that the overall environment remains challenging. In an attempt to curb inventory losses, Ulta has implemented new fragrance fixtures that require staff to access them using a key. However, some believe that the issue extends beyond perfume and requires further attention.
Analysts Weigh In
Piper Sandler analyst, Korinne Wolfmeyer, remains optimistic about Ulta’s stock and has rated it as Overweight with a target price of $540. However, in a report on November 20th, Wolfmeyer noted that she expects management to exercise caution this earnings cycle due to macroeconomic factors and a more promotional environment to drive purchases. She also stated that Ulta is offering larger discounts compared to the previous year for big-ticket items, suggesting that consumers are becoming more cautious with their spending habits.
On the other hand, Raymond James analyst, Olivia Tong, holds a strong belief in Ulta’s potential and rates the stock as a Strong Buy with a price target of $500. Tong acknowledged that ULTA shares have faced pressure due to concerns regarding slowing growth and margin normalization against challenging comparisons. However, she remains confident that the beauty industry will withstand such challenges, particularly during the holiday season, as it offers consumers an affordable luxury. Additionally, Tong expressed optimism regarding the continuous pace of innovation within the industry, which she believes will help maintain momentum.
Ulta Beauty continues to navigate the complex landscape of shrink and consumer behavior, with analysts expressing varied opinions on the company’s outlook. Despite the challenges faced, many remain positive about the resilience of the beauty industry and Ulta’s ability to adapt to changing market dynamics.
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