By Wall Street is eagerly awaiting the upcoming earnings report from Ulta Beauty, scheduled to be released on Thursday. This report will shed light on how the popular cosmetics retailer is navigating through a more challenging economic landscape.
Citi analyst Kelly Crago recently adjusted her price target for Ulta Beauty stock (ticker: ULTA) from $475 to $440. Despite maintaining a Neutral rating on the shares, Crago anticipates news that could potentially lead to a decline in the stock value.
As of Monday, Ulta Beauty’s shares were trading at $413.52, marking a 0.2% decrease. This year, the stock has experienced a 12% decline, contrasting with the S&P 500’s nearly 19% gain.
Crago explained, “We expect management to revise down its F23 guidance, adopting a more conservative approach for the holiday season due to slowing trends in the cosmetics category, as well as increased promotional activity and ongoing inventory loss challenges. Looking ahead to F24, we believe these difficulties will persist, prompting us to adopt a more cautious stance given the uncertain macroeconomic environment.”
Ulta Beauty has not yet provided a comment in response to requests for additional information.
Crago’s mention of “shrink headwinds” pertains to incidents such as theft and other forms of inventory loss. Retailers have observed a rise in shoplifting incidents, which has negatively impacted profit margins.
Ulta’s Efforts to Address Shrinkage Face Challenges
Ulta Beauty has been grappling with inventory losses, as observed by Chief Financial Officer Scott Settersten during the company’s second-quarter earnings call in August. While their efforts to address the problem have had an impact, they continue to face challenges in reducing shrinkage. To tackle this issue, Ulta has introduced new fragrance fixtures that require staff to open them with a key. However, some believe that the problem extends beyond the realm of perfumes.
Analysts’ Outlook on Ulta’s Stock
Piper Sandler analyst Korinne Wolfmeyer is optimistic about Ulta Beauty’s stock, giving it an Overweight rating and setting a target price of $540. Nevertheless, in a note dated November 20th, Wolfmeyer expressed expectations of management adopting a more cautious approach during this earnings cycle. This caution stems from the larger economic backdrop and a highly competitive promotional environment that would require additional measures to drive consumer engagement. Furthermore, she predicts that the company’s fiscal year 2023 outlook will remain unchanged.
Furthermore, Wolfmeyer highlighted that Ulta is offering more substantial discounts on high-value items compared to the previous year. This indicates that consumers are exercising greater caution with their spending habits.
However, not all analysts share these doubts. Raymond James analyst Olivia Tong maintains a Strong Buy rating for Ulta’s stock and has set a price target of $500.
A Positive Outlook on the Beauty Industry
Tong emphasized that ULTA shares may have faced pressure due to concerns about slowing growth and margin normalization against challenging comparisons. However, she believes that the beauty category will remain resilient within the overall consumer sector. As an affordable luxury option during the holiday season and with a continuous stream of innovative products, the beauty industry is expected to maintain its momentum.
By addressing inventory losses and incorporating cautious strategies amid competitive markets, Ulta Beauty strives to overcome challenges and reinforce its position as a leading beauty retailer.
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