Is Ulta Beauty’s Ugly Drop A Market Overreaction?

From 2014 to 2023, Ulta Beauty (ULTA) soared more than 400%, making it the fourth best-performing S&P 500 retail stock during this period, trailing only behind Amazon.com and auto parts chains O’Reilly and AutoZone.  

However, down about 8% so far in 2024, it is not yet clear if this year will end with a minor blemish on a spectacular growth story or the beginning of a sustained downturn.  

On April 3rd, Ulta Beauty’s market value plunged 15% after CEO Dave Kimbell and CFO Paula Oyibo presented a weak near-term outlook at J.P. Morgan’s 10th Annual Retail Roundup conference. This significant drop marked the second sharp decline in less than a month, both occurring amidst heavy trading volumes.   

This recent volatility raises concerns about the future of the U.S. beauty products and services industry, which has previously demonstrated considerable resilience even in an inflationary, rising rate economy. 

Prestige And Mass Market Demand Are Slowing 

During the fireside chat at J.P. Morgan’s monthly event, Ulta Beauty projected its year-over-year first-quarter comparable sales growth for 2024 would be in the low single digits. This represents a notable deceleration from the 5.7% growth reported in fiscal 2023 and falls well below the company’s full-year guidance of 4.5%.    

This anticipated slowdown appears to reflect broader industry challenges rather than issues specific to Ulta. The demand for cosmetics, haircare, and fragrances is struggling across both mass and prestige beauty categories. Mass market beauty products, which cater to lower-income consumers due to their larger scale production and lower price points, and prestige brands, known for their higher prices, are both experiencing declining sales.   

This broader market downturn has been corroborated by similar warnings from other industry participants such as Coty, e.l.f. Beauty, Estee Lauder, and Kohl’s, all noting a drop in consumer interest.   

Investors are now left wondering if the poor start to the year might lead to a stronger finish. Historically, Ulta’s performance in the holiday shopping season, which accounted for 32% of its fiscal 2023 revenue during the three months ending January 31, 2024, plays a crucial role in determining its annual outcomes. 

Too Much Makeup? 

The beauty industry is grappling with market saturation as consumers today face an unprecedented array of product choices. Last year alone saw luxury brands such as Prada and Dries van Noten entering the beauty sector, adding to an already crowded marketplace.   

Furthermore, major retailers like Walmart and department stores such as Macy’s are intensifying their presence in the beauty space. While brands strive to stand out by promoting cruelty-free and vegan-friendly products, the market has quickly become inundated with similar offerings, diluting the uniqueness of such claims.   

Compounding these challenges are the economic pressures on consumers, with persistent inflation and high interest rates continuing to squeeze household budgets. With discretionary spending under strain and a vast selection of products to choose from, 2024 is shaping up to be a challenging year for beauty retail stocks as limited spending may curtail overall industry growth. 

Wall Street Sees ULTA Recovering 

Despite recent challenges, Wall Street remains bullish on Ulta Beauty’s prospects. Following a significant selloff, Loop Capital upgraded the stock from Hold to Buy, describing the downturn as “well overdone.” The firm highlighted challenging comparisons from the first quarter and attractive valuation as key reasons for setting a price target of $540.  

Since last week’s price drop, eight other analysts have also rated ULTA as a Buy, versus one Hold rating, with no Sell ratings issued. The consensus target price now stands at $589, indicating potential for the stock to reach a new all-time high within the next year.   

Whether this positive outlook will materialize or if it merely represents overly hopeful speculation will become clearer when Ulta Beauty releases its first-quarter earnings for 2024 on May 30th.