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Why Ulta Beauty Stock Gained 23% in April

By Demitri Kalogeropoulos - Updated May 8, 2018 at 1:52PM

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A shift in investor attitudes produced a rally following a tough year for shareholders.

What happened

Spa services and beauty products retailer Ulta Beauty (ULTA 1.40%) gained 23% last month compared to a roughly flat S&P 500, according to data provided by S&P Global Market Intelligence.

ULTA Chart

ULTA data by YCharts.

The rally pushed shares back into positive territory for 2018, but the stock remains well off its all-time high of around $300 set in mid-2017.

So what

April's rally wasn't spurred by any official news out of the company. Instead, shares appeared to rise as investors grew more optimistic about its earnings prospects. An analyst at Piper Jaffray upgraded the stock early in the month, and that news helped produce a bounce following a 25% decline over the prior 12 months.

A customer has her hair washed at a spa.

Image source: Getty Images.

Now what

Ulta's latest earnings report, issued in mid-March, paired solid sales growth with a weakening profit picture. As selling conditions have worsened in the past year, and as the e-commerce channel jumps to a larger portion of the business, the company has abandoned its target of a 15% operating profit margin and now expects profitability to hold at closer to 13% in the current year.

Management believes market share gains will be well worth the temporarily reduced earnings growth. But investors will be scrutinizing its next earnings report, set for late May, for signs that this trade-off is still yielding market-beating sales.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Ulta Beauty. The Motley Fool has a disclosure policy.

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