ULTA Beauty Trades Below 200-Day Moving Average: Time to Hold or Exit?

Ulta Beauty, Inc. ULTA, a leading retailer in the beauty and cosmetic industry, has seen its stock price fall below critical technical thresholds, including its 200-day moving average. This moving average is an important indicator for gauging market trends and momentum. Yesterday the stock closed at $393.84, below the moving average of $436.89. The breach of this threshold heightens investors' concerns about the stock's short-term outlook and signals the potential for further downside if these levels are not reclaimed.

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Shares of Ulta Beauty have dropped 22.1% in the past six months compared with the industry's 12.2% decline. The S&P 500 has gained 9.4% in the same time. Currently, the stock stands below its 52-week high of $574.76.

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This decline in the stock price can be attributed to a combination of broader market dynamics and specific challenges encountered by the company. Let's see whether investors should exit or if this stock is on the verge of recovery.

Decoding Headwinds Behind ULTA's Dismal Stock Performance

ULTA is encountering challenges within prestige beauty. According to Circana data for the 13 weeks ended Aug. 3, 2024, the company retained market share in mass beauty, while losing share in the prestige beauty, particularly in makeup and hair categories. ULTA is also being impacted by changing consumer purchasing behavior, as they are increasingly prioritizing value over premium offerings in the face of inflationary pressures. It is also battling increased competitive pressures with the introduction of new points of distribution for prestige beauty products.

ULTA came across some unexpected operational challenges stemming from its Enterprise Resource Planning ("ERP") system transformation in the second quarter of fiscal 2024. While managing old and new systems during the transition, some disruption occurred in in-store inventory allocation. To reduce future disruption, ULTA is identifying key legacy processes causing friction and implementing proactive monitoring and dedicated support to quickly address issues as they arise.

Another aspect that impacted ULTA's performance was the effect of incremental promotions, which fell short of generating the expected sales lift. While these promotions drove traffic and sales on the company's digital platforms, they failed to generate a meaningful uplift in ULTA's brick-and-mortar stores. The increased frequency of offers, with new structures, pressured the average selling price without leading to additional purchases in stores.

ULTA's Weak Gross Margin and High Cost

Ulta Beauty experienced a contraction in gross margin in the second quarter due to lower merchandise margin and fixed cost deleverage. The merchandise margin decreased due to increased promotional activity, adverse impact from the brand mix and the continued lapping of benefits from price increases last year. For fiscal 2024, the company is expecting gross margin to decline, as lower merchandise margin and deleverage of store fixed costs are likely to be only partially offset by growth in other revenues and lower transportation costs.

Ulta Beauty also has been grappling with higher selling, general and administrative (SG&A) expenses for a while now. In the second quarter of fiscal 2024, SG&A expenses increased due to the deleveraging of store payroll and benefits, higher corporate overhead from strategic investments and increased store and marketing expenses.

Revised Outlook of ULTA

To adopt a more cautious approach, the company decided to revise ULTA's fiscal 2024 outlook downward at its last earnings call. ULTA now expects net sales to be in the range of $11-$11.2 billion compared with the previous guidance of $11.5-$11.6 billion. Comparable sales are expected to be flat to down 2% compared with the 2% to 3% growth projected earlier. For fiscal 2024, earnings are envisioned in the band of $22.60-$23.50 per share, lower than the earlier guided range of $25.20-$26.

ULTA's Earnings Estimates Decline

ULTA is currently in a tough spot. The Zacks Consensus Estimate for earnings per share has seen downward revisions. In the past 30 days, analysts have decreased their estimates for the current and next fiscal year by 8.9% to $23.21 and 10.5% to $25.16 per share, respectively.

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Factors Working in ULTA's Favor

ULTA is concentrating on reinforcing its competitive position and driving stronger performance through several initiatives. These include strengthening product assortment, increasing social relevance, enhancing the digital experience, leveraging a powerful loyalty program and evolving promotional strategies.

ULTA is consistently attracting new and lapsed members to the loyalty program while experiencing healthy growth in platinum and diamond members. By the end of the second quarter of fiscal 2024, the company had 43.9 million active Ulta Beauty Rewards members, a 5% increase from the previous year. The company's brand awareness and loyalty are showing significant gains across multiple demographics.

With a distinct business model, Ulta Beauty offers unique and lasting experiences both online and in-store. Although some aspects have faced challenges, the company continues to engage effectively with customers. ULTA focuses on enhancing guest experiences, assortment, loyalty programs, services and omni-channel offerings.

Unlocking ULTA's Valuations

Although ULTA's stock is currently trading at a discount compared with its industry peers, this valuation disparity might not be as favorable as it seems. The lower price could be indicative of underlying issues rather than representing a clear investment opportunity.

ULTA is currently trading at a discount to its industry benchmarks. The stock has a forward 12-month P/E ratio of 16.09 compared with the industry's forward 12-month P/E ratio of 16.59.

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ULTA's Investment Analysis

Ulta Beauty's stock decline points to several challenges, including slowing beauty category growth, heightened competition, changing consumer trends and ERP system disruptions. The company's reduced fiscal 2024 guidance, coupled with negative sentiment from analysts, indicates that it could face ongoing difficulties. While omnichannel expansion and loyalty program improvements are noteworthy, these may not be enough to counter current obstacles. With persistent issues and an uncertain future, investors should approach the stock with caution. Currently, Ulta Beauty stock carries a Zacks Rank #5 (Strong Sell).

Stocks to Consider

Here, we have highlighted three better-ranked stocks, namely Abercrombie & Fitch Co. ANF, Sprouts Farmers Market, Inc. SFM and Nordstrom, Inc. JWN, currently sporting a Zacks Rank #1 (Strong Buy) each.

Abercrombie & Fitch is a global, digitally-led, omnichannel specialty retailer of apparel and accessories catering to kids through millennials with assortments curated for their specific lifestyle needs. ANF has a trailing four-quarter earnings surprise of nearly 28%, on average.

The Zacks Consensus Estimate for Abercrombie & Fitch's current fiscal year's sales and earnings indicates growth of 13.1% and 63.4%, respectively, from the year-ago reported numbers.

Sprouts Farmers Market engages in the retailing of fresh, natural and organic food products under the Sprouts brand in the United States. SFM has a trailing four-quarter earnings surprise of around 12%, on average.

The Zacks Consensus Estimate for Sprouts Farmers Market's current financial year's sales and earnings suggests a rise of 9.6% and 18.7%, respectively, from the year-earlier reported figures.

Nordstrom, a fashion retailer, provides apparel, shoes, beauty accessories and home goods. JWN delivered an earnings surprise of 29.7% in the last reported quarter.

The Zacks Consensus Estimate for Nordstrom's current financial year's sales implies growth of 0.6% from the year-ago reported number.

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