Ulta Beauty Stock Still Has Much More Muscle to Flex

ULTA stock - Ulta Beauty Stock Still Has Much More Muscle to Flex

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When viewed from a long-term perspective, few specialty retailers can compete with Ulta Beauty (NASDAQ:ULTA). Over the trailing five-year period, ULTA stock has more than doubled in price. Additionally, shares were once trading at less than $5 during the Great Recession. At nearly $240 today, you don’t have to be a mathematician to recognize the performance.

After soaring over $300 a pop in early summer last year, ULTA stock finally hit some turbulence. The beauty and cosmetics specialist couldn’t keep up with rising expectations. As a result, investors read between the lines, and sold out of their positions. By the end of 2017, ULTA shares had declined almost 13%, an uncharacteristic showing.

While this year witnessed contrarians jump onto ULTA stock as a discounted opportunity, it hasn’t panned out ideally. Primarily, shares have gyrated significantly over the past eight months. And the year-to-date haul currently isn’t that impressive, up a little less than 7%.

That lethargy puts would-be investors in a quandary, especially with the company’s second-quarter earnings report just around the corner. Still, I have three reasons why you should consider buying ULTA stock.

ULTA Stock Is (Almost) Amazon-Proof

No retailer can claim that they’re perfectly insulated from Amazon (NASDAQ:AMZN). Forget the negative impact that the e-commerce industry is leveling against traditional brick-and-mortars. Amazon competes as if they have a chip on the shoulder. Whether they want to attack grocery stores or cloud computing, they engage new endeavors with ferocity.

But not all businesses have fallen victim to the e-commerce giant. Some firms like Best Buy (NYSE:BBY) revamped their business model to make them more relevant to twenty-first century consumers. Others like Home Depot (NYSE:HD) enjoy a natural moat. In this case, Home Depot’s core consumers prefer the brick-and-mortar model’s inherent conveniences.

The latter fits Ulta Beauty’s advantage against Amazon. InvestorPlace contributor Laura Hoy explains that the company offers more than just products. Hoy writes:

“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.”

Try as they might, Amazon can’t compete with the “holistic” experience that the beauty specialist offers its loyal customers.

Beauty Industry Is Big Business

Earlier this year, management conceded that its makeup business slowed during Q4 2017. This admission led to investor fears that the broader cosmetics industry slowed down. While I can’t speak for individual blips on the radar, sector data indicates that beauty is booming.

According to the NPD Group, the industry experienced significant growth across multiple subsegments last year. In particular, the skincare category increased sales 9% year-over-year, and contributed 45% to overall growth. Furthermore, fragrance revenues improved 4% from 2016 results.

And what about makeup? In 2017, this sub-segment experienced 6% growth. The issue that impacted ULTA stock and its rivals is that growth slowed; it did not, however, go negative. Plus, makeup represents the beauty industry’s biggest component. It may experience a slow year, but the segment is unlikely to decline.

I say that with confidence because skincare witnessed disappointing sales performances before it ramped up in 2017. In other words, consumer trends can make certain components weaker in any given year. But the overriding message is that the broader sector enjoys consistent robust demand.

When you consider millennial women’s thirst for makeup and other cosmetic products, you should come to one conclusion: ULTA stock has a very bright future ahead.

Thanks to Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) YouTube platform, young consumers enjoy a plethora of product reviews and styling tips. In addition, A-list celebrities often promote their branded cosmetics to an eager and willing market.

Believe me, any calls for impending doom toward ULTA stock are greatly exaggerated.

Ulta Has Many Advantageous Opportunities

Recently, I had the honor of speaking with National CineMedia (NASDAQ:NCMI) CEO Andy England. During our conversation, I mentioned that Hispanic moviegoers represent the biggest audience per capita. England affirmed this trend by adding that the Hispanic demographic skews younger than many other groups.

This reality opens up increased opportunities for National CineMedia and its movie-advertising business. In the same way, Ulta’s management team can also use this trend through targeted marketing. I realize that their leadership understands this concept. However, retailer-specific data suggests that Ulta can still generate more sales and engagement with Hispanic millennials.

The company also has other demographic avenues to boost ULTA stock. For instance, young Asian Americans boast higher-than-average education attainment and income levels. Targeting Asian millennials is simply smart business. Again, I know that Ulta already does this: I’m just saying that they could step on the gas further, and likely see satisfying returns.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2018/08/ulta-beauty-ulta-stock-still-has-much-more-muscle-to-flex/.

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