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StockBeat: Ulta Beauty Turns Heads Amid Surge, But Wall St. Sees Trouble Ahead

Investing.com – Ulta Beauty (NASDAQ:ULTA) was surging higher Friday after its third-quarter results were not as bad as feared. But some on Wall Street see potential headwinds on the horizon for the cosmetic retailer.

Late Thursday, Ulta Beauty reported earnings of $2.23 a share, topping estimates of $2.13 a share and up from $2.18 in the year-ago quarter. But revenue of $1.68 billion fell just short of $1.69 billion, although up 7.7% from a year ago.

Ulta Beauty (NASDAQ:ULTA) rose 13% and was the day's top performer in the S&P 500 and the Nasdaq 100 indices. The shares are up 14% this month and 9% on the year.

Sales of higher-priced celebrity-led beauty brands boosted margins and underpinned profit growth.

Gross profit as a percentage of net sales increased 40 basis points to 37.1% compared to 36.7% in the third quarter of fiscal 2018.

But while some on Wall Street have increased their price target on Ulta, they also sounded a caution note on the backdrop for cosmetics.

Nomura raised its price target on Ulta (NASDAQ:ULTA) to $230 from $215, but maintained a reduce rating on the stock, on fears that sales of color cosmetics, a key driver of growth for the retailer will likely remain weak at least into mid-2020.

Weakness in Ulta's color comestics may force the retailer to cut its earnings forecast in the future, the bank added.

Wells Fargo echoed fears of weaker cosmetic sales.

"Slowing cosmetic trends and shifting industry dynamics will meaningfully pressure the business, even as they generate robust comps for the broader retail space,” Wells Fargo said.

The worries about future earnings is not without merit as the cosmetic retailer trimmed its outlook on full-year earnings.

For fiscal 2019, earnings-per-share guidance was narrowed to a range of $11.93 to $12.03, compared with $11.86 to $12.06 previously. Ulta Beauty earned $10.94 in the 2018-19 fiscal year.

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