Fearing Soft Sector Trends, Ulta Beauty Shares Downgraded

Ulta's stock weakness could be attributed to the possibility of Amazon.com, Inc. AMZN jumping in to the beauty space — but this is only half the story, Parikh said in his downgrade note. The other half of the story is that the beauty market as a whole isn't as strong as many believe it to be. France-based cosmetics company L'Oreal (L'Oreal SA (ADR) LRLCY) reported its earnings last week, which contained "softer commentary," the analyst explained. For example, the company acknowledged the beauty market in the U.S. is "less than [even] last year due to a much [softer] mass market." The company also said the beauty market has been "amazingly slow since January after a lively market in 2016." Related Links: For Growth Stocks, Valuation Doesn't Matter... Until It Does Analyst Sees Opportunity To Buy The Dip In Ulta Beauty, Adds To Conviction List

"If our read of L'Oreal's assessment is accurate, this, coupled with increased department store discounting, could suggest a less robust US beauty market," the analyst said.

Based on a revised assessment of a now weaker beauty market, the analyst is predicting decelerating comp trends going forward. Ulta may need to become increasingly promotional, Parikh concluded.

A revised $270 price target assumes Ulta's stock will trade at a 13x multiple on the analyst's fiscal 2018 EBITDA estimate, which is a multiple that is merely in line with its historical average.