Ulta Beauty (NASDAQ: ULTA) shares have been underperforming the market lately, leaving shareholders worried about its future returns. That’s understandable. The spa and beauty products retailer posted higher earnings in its most recent quarter, yet sales trends were disappointingly weak.
That bearish narrative might not improve, at least in the short term. Last week, an analyst at Jefferies downgraded the stock from a buy rating to a hold while slashing the firm’s 12-month price target. Ulta Beauty might land at $438 per share in that time, representing very little upside from its current price of roughly $415 per share. The analyst’s prior target was $585 per share.
Why is Ulta stock down?
The analyst points out that the retailer faces some big headwinds. For one, the makeup category is slowing down to a more normal growth rate following its post-pandemic spike. Competition is rising at the same time, according to the downgrade.
I’m sympathetic to those concerns. In March, Ulta Beauty reported just a 2.5% uptick in comparable-store sales to close out 2023 while projecting 4% to 5% gains in fiscal 2024 (compared to 6% gains last year). Customer traffic rose in the period, yet consumers are clearly more cautious in their spending patterns.
Ulta had to cut prices in response to competitive promotions, too, reducing profit margins. The company’s profit fell to 15% of sales last year from 16% and management projected another drop ahead for 2024.
Where is Ulta headed?
The good news is that Ulta’s earnings power is still well ahead of where it was before the pandemic. And Ulta is still winning market share, even as its industry growth slows to a crawl. Shoppers remain engaged with the company, both in stores and online, so it’s in no danger of losing much ground competitively.
Still, investors should brace for additional weak earnings reports as we progress deeper into 2024. That’s no reason to sell the retailer’s stock, but Ulta’s tough operating environment will pressure its sales and earnings potential in the short term.
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Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Ulta Beauty. The Motley Fool has a disclosure policy.
Ulta Beauty Stock Has Little Upside, According to 1 Wall Street Analyst was originally published by The Motley Fool