Reply To: Traders Market Weekly: Memorial Weekend a Time for Reflection


Ulta Beauty (ULTA +10%) shares are looking to “makeup” ground lost during the past few weeks after succumbing to the crossfire of a broad sell-off in retail that followed earnings releases from Walmart (WMT) and Target (TGT).

The beauty retailer outperformed on numerous metrics, achieving sizable beats on its top and bottom lines and delivering same-store sales growth that more than doubled what consensus predicted. Additionally, ULTA upped its FY23 earnings, revs, and comparable sales forecasts. The company now expects EPS of $19.20-20.10, about 6% higher at the midpoint from its prior range, and comp growth of +6-8%, a solid jump from prior targets of +3-4%.

ULTA grew its adjusted earnings over 50% yr/yr to $6.30 per share as operating margins reached a record 18.7% in Q1. Meanwhile, revs jumped 21% yr/yr to $2.35 bln, and same-store sales grew +18%. ULTA’s comps are made more notable given that the company was lapping comps of +65.9% last year, giving it an excellent two-year figure of +48.6%.

Over the past couple of weeks, there were a few clues that the beauty industry could be better shielded than other retail niches from the inflationary pressures that bottlenecked headline results from companies like WMT, TGT, and Kohl’s (KSS).

For instance, one of the few bright spots in KSS’s otherwise disappointing AprQ earnings report was the offering it provides through its partnership with beauty retailer Sephora, which comped positively in the quarter while KSS posted -5.2% comps overall.
Also, TGT, within which ULTA continues to open additional shop-in-shops, benefited from double-digit comp growth in its beauty category, reflecting its expanded ties with ULTA.

Furthermore, despite rising inflation, beauty manufacturer Coty (COTY) raised its FY22 earnings guidance earlier this month. The company noted that demand for its products remains resilient, particularly for the more premium brands.

Still, one beauty retailer, Bath & Body Works (BBWI), increased the fear that ULTA could have experienced weakness in Q1. Last week, BBWI guided JulQ earnings below consensus and trimmed its FY23 EPS outlook. The company commented that macro factors such as inflation would impact its FY23 results, possibly causing the year to vary from its longer-term growth algorithm.

Although ULTA raised its FY23 guidance nicely, rampant price inflation still created enough uncertainty that ULTA chose to keep its longer-term targets unchanged. Also, even given Q1’s double-digit supply chain cost increases yr/yr, ULTA anticipates even higher input costs going forward, meaning that its record Q1 operating margins likely to be more of a one-off situation, as it guides for FY23 margins of 14.1-14.4%.

Overall, the market may have underestimated the strength and resilience of the beauty industry, which is demonstrating its ability to outperform despite unabated inflationary forces. These headwinds are still creating issues for ULTA, as evidenced by its decision to not touch its long-term goals. However, ULTA’s excellent Q1 results are a good sign that it can continue to deliver outperformance even as prices continue to rise.