KeyBanc: 4 Reasons To Buy Weakness In Ulta Beauty

Ulta Beauty Inc ULTA reported better-than-expected third quarter results and reaffirmed its 2017 guidance. The fourth quarter earnings per share guidance trailed expectations.

Ulta Beauty shares are reacting with a move to the downside.

The Analyst

KeyBanc Capital Markets analyst Jason Gere reviewed the quarterly results in a Thursday note. The analyst reiterated an Overweight rating and $270 price target for Ulta Beauty.

The Thesis

The fiscal third quarter results and fourth quarter guidance provided the balanced approach Gere hoped to see, he said in the note. (See Gere's track record here.)

The analyst said he would be a buyer of the shares on any potential weakness.

The Ulta story can work from here due to the following factors, Gere said:

• Sustainability of comps outperformance, with a 10 percent comp likely in 2018.
• The operating model taking hold and driving sales growth.
• Still-nascent omnichannel growth.
• Mid-20 percent earnings per share growth, which is unheard of in the retail sector.

Despite the hurricane impact, the analyst said Q3 comps came in at 10.3 percent, in line with expectations. Softness in makeup was offset by the strength of the portfolio, the analyst said.

By leveraging overhead and controlling expenses, which offset the impact of gross margin contraction, Ulta was able to report above-consensus bottom-line results, according to KeyBanc. 

Notwithstanding the lackluster fourth quarter guidance, the firm said Ulta looks good in a traditionally difficult quarter.

"Multiyear investments in infrastructure are now at a point to deliver leverage and flexibility for management to maintain targeted merchandising and other initiatives for strong comp sustainability."

KeyBanc projects 20-percent-plus earnings per share growth is made possible by Ulta's best-in-class comps and operating margin improvement  — something that's not reflected in the valuation afforded by investors. 

The Price Action

At the time of writing, shares of Ulta Beauty were down 7.02 percent at $206.15.

For the year-to-date period, Ulta shares are down about 18 percent.

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