This could be the best opportunity to buy this stock in years.
Beauty and cosmetics retailer Ulta Beauty (ULTA -0.02%)The performance of the company's share price has not been pleasant in the last six months. Slowing growth and falling profit margins have sent stocks reeling; Shares have fallen from nearly $600 to less than $400 in just the last six months.
Although stocks had reasons to fall, the stock market often becomes overenthusiastic. There is a strong argument that Ulta Beauty sales have gone Very farand the stock is poised to rebound strongly. Hereโs why Ulta Beauty is a beautiful buy for investors right now.
Why has the stock fallen so much?
Beauty and cosmetics are cultural staples, not only in the United States, but around the world. Ulta Beauty is the largest cosmetics retailer in the United States, with 1,395 stores and one e-commerce store. It sells tens of thousands of products from hundreds of brands. Ulta has also become a full-fledged brand; The company interacts with customers through social networks and loyalty programs.
Ulta had just 449 stores in 2011. The constant opening of new stores has fueled relatively uninterrupted sales growth for years outside of the pandemic, which affected virtually any business with brick-and-mortar stores. Steady, profitable growth has made Ulta Beauty a market leader; the stock has outperformed S&P 500 Index approximately 3 to 1 since the company IPO in 2007.
Consumers were flush with pandemic cash, boosting Ulta's business. Those tailwinds have faded, however. Sales growth has slowed steadily since peaking in 2021, while gross profit margins peaked in late 2022:
ULTA Gross Profit Margin data for Y Charts
Management has pointed to increased theft and lower-margin sales as the culprits behind margin pressures. That makes sense; consumer savings rates have fallen below pre-pandemic levels. Naturally, a retailer will struggle if shoppers have less money and opt for cheaper brands. As much as people try to maintain their beauty regimen, cosmetics are ultimately a discretionary budget item.
Not everything is bad
The good news is that Ulta Beauty's formula for success has been working for many years, and there's little reason to believe it won't continue to do so.
The company is still opening new stores and remodeling existing locations. Management anticipates 60 to 65 new store openings in 2024 and another 40 to 45 remodels. The new stores will increase total locations by 4% to 5%, essentially driving single-digit revenue growth for the business.
Renovations and an eventual consumer recovery should boost sales at existing stores. Analysts believe Ulta Beauty's annual revenue growth will average between 5% and 6% over the long term.
ULTA Free Cash Flow data for Y Charts
Ulta Beautyโs falling margins arenโt necessarily cause for panic. Current gross margins of 38.9% are still notably higher than before the pandemic, when Ultaโs margins were about 36%. The companyโs free cash flow is still within striking distance of decade highs, which should continue to fuel future growth. share buybacks. It has reduced its share count by 26% over the last decade, helping to drive earnings per share growth.
Ultimately, investors must determine whether Ulta Beauty can continue to drive long-term growth. Nothing here suggests it can't.
The sale has gone far enough
The market has aggressively sold off Ulta Beauty stock over the past few months and the stock has become cheap. The company averaged a price-earnings ratio of 32 in the last decade. Today, Ulta Beauty trades at just 15 times its estimated 2024 earnings. less than half its long-term average valuation.
It would make sense that Ulta Beauty's business would be severely damaged, but that does not appear to be the case, as has been discussed. Furthermore, analysts are optimistic and expect the company to grow earnings by an average of more than 12% annually over the long term.
There's a famous saying that the stock market can sometimes be irrational. That saying works both ways, meaning stocks can get remarkably expensive or cheap, depending on the whims of Wall Street. Ulta Beauty has fallen out of favor, and the market has used some legitimate short-term hiccups to sell off the stock unfairly.
The stock is a bargain at this price, making it an attractive buy for long-term investors willing to wait for these challenges to subside.
Pope Justin has no position in any of the stocks mentioned. The Motley Fool has posts and recommends Ulta Beauty. The Motley Fool has a disclosure policy.
