Investors love Ulta Beauty (NASDAQ:ULTA) at the moment. Ulta stock hit an all-time high on Friday, after a blowout fiscal fourth-quarter earnings report. The 8%+ gain of Ulta stock after the company’s earnings were part of a much larger pattern: Ulta Beauty stock has risen 251% in the last five years.
That’s an impressive performance in any sector. In a retail industry that’s had few winners in recent years, it’s downright extraordinary. And Ulta stock has earned every cent of its gains. It’s established a hugely successful “omnichannel” model. The company’s loyalty program is a massive success. As a result, its same-store sales are the envy of the industry.
ULTA has a hugely attractive business. Indeed, I’ve recommended Ulta Beauty stock on this site several times, most recently in late August. But with Ulta stock soaring after last week’s Q4 report, it’s difficult to be quite as aggressive at these levels. Ulta stock definitely shouldn’t be cheap, but at this price, it’s starting to look expensive.
Has Ulta’s Performance Really Been That Good?
It looks like Ulta Beauty stock easily merits a huge earnings multiple. ULTA’s earnings per share, excluding some items, rose 33% in fiscal 2018, which ended in January 2019. Brick-and-mortar retailers simply aren’t posting that type of growth these days. So a price-earnings multiple of 25 or 30 for Ulta stock hardly seems out of line.
But looking a little closer, we can see that the company’s profit growth isn’t quite as impressive as its headline numbers suggest. ULTA’s EPS got big boosts from tax reform and share buybacks in FY18.
The company’s pre-tax numbers indicate that its business is doing well, but that its business is not quite as good as its headline EPS figures suggest. The company’s operating profit margins actually fell 0.6 percentage points in fiscal 2018, and ULTA only expects them to rebound 0.1-0.2 percentage points in FY19.
Ulta is making some investments in its business, which explains some of the pressure on its near-term profits. But as even as its sales performance remains torrid, that top-line growth isn’t as profitable as it could or possibly should be. Part of that simply is a retail problem: incremental margins aren’t the same as they are in tech. That’s the key reason why ULTA isn’t going to get the earnings multiple that tech leader like Salesforce.com (NYSE:CRM) obtain.
Indeed, in FY18, ULTA’s operating profit increased less than 9%. Its FY19 guidance suggests that its growth this year will be closer to 12%-14%. As a result, ULTA expects its EPS to climb 17%-18% this year, thank to its buybacks of Ulta stock. But that’s notably lower than the 30%+ EPS growth it posted last year.
Is the Valuation of Ulta Stock Too High?
Meanwhile, investors truly are paying up for Ulta stock. ULTA trades at nearly 27 times the high end of its FY19 EPS guidance. The only other brick-and-mortar retailers getting similar multiples at the moment are Five Below (NASDAQ:FIVE) and Lululemon Athletica (NASDAQ:LULU).
And it’s worth noting that both FIVE and LULU seem to have hit a ceiling. Both companies posted blowout earnings toward the end of the summer (Lululemon in late August, Five Below in early September). Both stocks hit all-time highs soon after. From those highs, FIVE is down 14%, and LULU has fallen 13%.
It’s not impossible that well see something similar happen to Ulta stock. The company’s blowout- earnings release led to a series of upgrades by analysts, as Benzinga pointed out. The three bullish analysts moved their price targets to $350, $365, and $380. The highest of those targets suggests about 11% upside in Ulta stock from its current levels.
In this market, 27 times forward earnings for mid-teens growth isn’t bad. But it’s not exactly a steal, either. Again, I have recommended Ulta stock in the past , but the last time I touted it was when it was trading for $230 per share. Elsewhere on this site, Luke Lango accurately predicted that a new line from Kylie Jenner would boost the stock and assigned a price target of $300 to Ulta stock. In that context, $342 seems to be asking a lot.
Don’t Short Ulta Stock, But Consider Taking Profits
None of this means that Ulta Beauty stock should be shorted. A well-run, growing company with room for expansion is the exact opposite of a good short target. Indeed, at at a time when most brick-and-mortar retailers have at least reasonable short interest, ULTA largely has been left alone.
But valuation matters , even in what has again become a bull market. And I question whether investors really are going to pay 30 times earnings for Ulta stock. The sector’s recent history shows that investors are hesitant to give even the best retailers that valuation.
Ulta Beauty still is a wonderful company. Ulta stock, however, simply isn’t a bargain anymore.
As of this writing, Vince Martin has no positions in any securities mentioned.