Since hitting a 52-week low of $330 earlier this year, Ulta Beauty (ULTA -2.08%) stock is up 45% at the time of writing. Year to date, its 16% gain significantly outperforms the S&P 500 index loss of about 17%.
Ulta Beauty has delivered strong earnings results that have fueled the share price higher, and the stock's relatively low valuation leaves room for more gains in 2023 and beyond.
Another beat-and-raise quarter in the bag
It is rare to find retail companies beating Wall Street's earnings estimates and repeatedly raising forward guidance in this market downturn, but that's exactly what Ulta Beauty has delivered and what is fueling the stock's move higher.
In the company's fiscal 2022 third quarter (ended Oct. 29), net sales grew 17% over the year-ago quarter to $2.3 billion, beating analysts' estimates of $2.2 billion. Earnings per share came in at $5.34, up a robust 51% year over year and outperforming estimates of just $4.09.
Ulta Beauty continues to benefit from growing demand for cosmetics and other beauty products. It now has a record 39 million loyalty members, and management reported that spending per member is growing across all demographics. The company is also experiencing double-digit growth across several product categories, including skincare, fragrance, bath, hair care, and makeup.
Based on the company's strong results, management raised the outlook for the full year, once again. Sales are now expected to land between $9.95 billion to $10.00 billion, or about $300 million higher than previous guidance. Most importantly, strong top-line growth is driving leverage over the company's fixed costs, which is pushing margins and profits higher.
Companies that continually exceed expectations are usually wealth-building stocks you want in your portfolio for the long term. Looking underneath the numbers shows plenty of signs Ulta Beauty can keep the momentum going.
Image source: Getty Images.
Why Ulta Beauty stock is a buy
Ulta Beauty is driving strong growth despite higher selling prices -- an indicator that its brand stands out in the marketplace. Moreover, the majority of its comparable sales growth, which clocked in at 14% last quarter, was driven by new products, another sign of healthy demand.
The company is benefiting from an expanding cosmetics market that is expected to grow from $81 billion in 2021 to $131 billion by 2026, according to Statista. It has a wide product selection that ranges from budget-friendly to high-end products, and it's pushing into new categories too.
For example, during the earnings call, management highlighted the opportunity in wellness products. While wellness is currently a small part of the business, the emotional connection and importance that customers place on self-care tends to lead to incremental sales, which management believes is a huge opportunity.
Even with the headwinds affecting consumer spending in the near term, management sees more growth in 2023, although comparable-sales growth will likely slow from the recent double-digit rates to the company's long-term target of between 3% to 5%.
Investors can buy shares at a reasonable valuation of 21 times full-year fiscal 2022 earnings estimates. That is a slight premium to the S&P 500 average price-to-earnings ratio. Considering Ulta's record of above-average growth, it deserves that premium, making the stock an attractive investment.
