Ulta Beauty (ULTA -0.40%) isn't your average retailer stock. The spa and beauty products specialist earns unusually high profits, after all, and has been seeing excellent customer traffic levels even as consumer spending rates slowed through early 2023.
The stock's returns have turned negative recently, though, due to Wall Street worries about a potential price-cutting war ahead in the makeup industry. But smart investors know that Ulta Beauty has a lot going for it as a long-term holding right now. Let's take a look at a few critical, but less followed aspects of this retailing business.
1. Pretty margins
Ulta Beauty sells beauty products that cover every price point from mass market to luxury. This approach allows it to cater to a wide range of shopper preferences. Toss in the company's large footprint -- both online and in physical retail -- and you've got a recipe for market-thumping profitability.
ULTA Operating Margin (TTM) data by YCharts
In late May, the retailer announced a modest drop in operating profit margin as competitors began offering more aggressive promotions. But its current 17% profitability stacks up well against most other successful retailers. Tractor Supply's comparable figure is around 10% and Target's is closer to 6%. "We remain confident in the resilience of the beauty category and in our ability to drive [market] share and profitable growth," CEO Dave Kimbell told investors.
2. Engaged shoppers
Smart investors love to find a company with strong customer loyalty, and Ulta Beauty checks this box. For example, it's seeing robust customer traffic growth, which last quarter was a blazing 11%. But you can also see evidence in Ulta Beauty's high profit margin and its growing loyalty program, which last quarter expanded by 9% to cross 41 million members.
Management says this industry-leading engagement is a reflection of the company's wide range of merchandising across every key category that's always abreast of the latest trends. "Nobody does what Ulta Beauty does," Kimbell said in a conference call with investors.
3. Mixed outlook
Wall Street reacted harshly to management's recent revenue downgrade. Ulta Beauty says it has been seeing more price cuts from rivals as sales trends slow back down to normal. As a result, comparable-store sales are still likely to grow by between 4% and 5% in 2023 following last year's 16% spike. But profit margin will decline to about 15% of sales from 16% last year.
That's no reason to abandon the bullish thesis for this growth stock. Ulta Beauty is still winning market share in an attractive industry. Its profit margin remains far higher than it was before the pandemic, and customers are highly engaged with its brand.
That's why investors should consider the latest share-price drop as an opportunity to buy the stock at a discount. Ulta Beauty is valued at close to 2 times annual sales today, down from recent highs of over 3 times sales. Smart investors can take advantage of the worries around short-term growth trends and buy while the stock is down.
