March has been a bumpy month for beauty product retailer Ulta Beauty Inc (NASDAQ:ULTA). ULTA stock was under pressure early in the month after bad press made both customers and traders skeptical of the firm’s management practices. Then Ulta’s earnings, although mostly positive, disappointed investors with lackluster projections for 2018.
Since the earnings came out, ULTA has stabilized somewhat, but at just $216 per share the stock is still well below it’s 52-week high of $314. Ulta has been one of the few retailers to continue delivering gains in the wake of the retail revolution making it an investor favorite in the sector. However, recent setbacks have dampened the mood on ULTA stock, leading many to question if now is a good time to jump on board.
Management Missteps at ULTA
Earlier this month, Ulta was plagued by a series of tweets accusing store managers of repackaging used, returned items and reselling them as new. This revelation upset the company’s customer base and caused some traders to question the firm’s long-term potential.
Although the allegations didn’t paint the company in a particularly flattering light, they’re unlikely to bring the firm down completely and shouldn’t give investors much of a reason to sell. Some have pointed to the incident as evidence that the company’s performance targets are pushing managers to focus on the wrong metrics, but so far the issue appears to be isolated to only a few stores. Not only that, but it’s easily fixable and will likely blow over soon.
More concerning for ULTA stock investors was the firm’s Q4 results. While there was a lot to like about the earnings report, one glaring detail worried investors- 2018 guidance. ULTA CFO Scott Settersen said the company is expecting revenue growth to be in the low teens and comp sales growth is only expected to be between 6% and 8%- a disappointing drop from 2017’s 11%.
That’s not anything to write home about, but I also don’t think it should be a deal breaker for ULTA investors. The company is working to expand in all the right places and appears to be successful in doing so. In the e-commerce space, Ulta experienced higher-than-expected growth, with online sales making up about 13% of the firm’s overall sales in the fourth quarter. In 2018, e-commerce sales are seen rising by 40%.
The firm has also been working to continue building its already strong brand name by expanding the number of physical locations and growing its already successful loyalty program. According to data from Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), Ulta was the number 1 most searched beauty store last year — a testament to the firm’s popularity among consumers.
Cosmetics Industry Slowdown
Another concern for ULTA investors has been a larger slowdown in the cosmetics industry in general. Even Ulta’s management admitted during its earnings call that its core makeup business slowed during the fourth quarter.
That kind of trend is worrying for investors because it suggests that ULTA isn’t quite as immune to the problems plaguing the retail sector as they thought.
The Bottom Line for Ulta Stock
ULTA stock certainly doesn’t come without any risks, and the slowdown in the cosmetics space is definitely something to keep an eye on — though it seems unlikely that consumers will ever start to shun makeup all together.
Ulta has a relatively strong moat in that it offers shoppers an experience they can’t get anywhere else. The firm’s wide range of price points and beauty brands makes it appealing to all types of consumers, and the fact that many of its products are available to try gives people a reason to visit the stores and shop around.
Ulta has also trained and incentivized its staff so they won’t focus on making sales — that makes the shopping experience at Ulta stores much lower pressure than you might find at a department store cosmetics counter.
The lackluster guidance is certainly something to keep an eye on, but the firm looks to be pointed in the right direction. Management has vowed to focus on improving operations and boosting margins as online sales grow and cut in to profits, and the company has stuck to its physical store expansion plans. At its current valuation, I’d say ULTA stock is a opportunity for long-term investors.
As of this writing, Laura Hoy was long AMZN.