Ulta Beauty Inc Looks Good, But Risky
After being beaten down so significantly last year, retailers are beginning to rebound and I believe one of the best ways to play that bounce is with Ulta Beauty Inc (NASDAQ:ULTA). This is a company with good growth, and it has a strong franchise and fundamentals to keep it moving over the longer term.
Source: Mike Mozart via Flickr
While the road to riches hasn’t been easy for ULTA — fears of an increasingly competitive environment along with changes in consumer behavior weighed on it for quite some time — it’s come back a long way. I believe the turning point for the company was its third-quarter earnings results.
While the stock initially fell on the heels of its report on Dec. 1 — it hit a low of $201 after trading over $226 the day before — the stock quickly snapped back and closed the next trading day above $221.
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
At the time, Wall Street’s main concern was the decline in gross margins, which fit into the bears’ narrative of growing competition. However, the tighter margins were also due to growth in the online business, product mix, a lack of innovation in color make-ups and some promotional pricing. Meanwhile, with total sales up 18.6% and comparable store sales up 10.3%, the company should generate enough volume to allow overall margins to be roughly flat for the quarter despite the negative impact on sales.
In fact, management noted that they did not see any significant increase in the promotional environment of that quarter and remained confident in their long-term goal of getting operating margins to 15% by 2020, compared to the 12.4% through the first nine months of 2017. This will help the company reach an annual EPS increase of 20% over the next few years.
ULTA Stock Is Stuck in a Tug-of-War
Right now the stock is stuck in a tug-of-war between the bulls and bears, with the bulls pointing to its reasonable valuation and the bears focused on the future direction of the company’s margins. While I do think there’s good long-term growth ahead for ULTA — it’s still expanding comparable store sales by 10% and building customer stickiness through its loyalty program — the company’s upcoming earnings report in March could create some short-term roadblocks.
The stock is having a tough time remaining above $240, which tells me there’s a good amount of nervousness in front of earnings. Any slight miss could result in an unfairly harsh punishment, sending shares back toward its lows.
ULTA traded over $300 last May, and I do think it can get there again, but with risk building in the name ahead of earnings, I recommend considering your risk tolerance if you want to add this name before the numbers are out.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
More From InvestorPlace
The post Ulta Beauty Inc Looks Good, But Risky appeared first on InvestorPlace.
