In just a matter of weeks, investors will receive tons of fresh data about the health of Ulta Beauty's (ULTA -0.40%) business. On Aug. 24, the spa and beauty products retailer is due to announce results for its fiscal second quarter, ended in July, and update its full-year outlook.
The stock has underperformed the S&P 500 since Ulta's last earnings report, which showed signs of slowing demand and increasing profit pressures in the core makeup and skincare niches. These factors convinced many investors to look elsewhere in search of an attractive growth stock.
But Ulta Beauty's short-term challenges shouldn't turn you off of this investment. Let's look at a few big reasons to like this stock ahead of its upcoming earnings announcement.
Winning market share
Sure, Ulta Beauty isn't growing as quickly as it has been. Comparable store (comps) sales gains slowed to 9% in the first quarter from a blazing 16% in the prior quarter. Average spending even declined slightly in the period as the company cut prices in response to promotions by industry rivals.
There are bigger bright spots to focus on, though. Ulta won market share through late April, for example, and customer traffic soared higher by 11%. Few other national retailers can count anything like that boost in transactions, notwithstanding those price cuts. And the company's 9% comps improvement came on top of an 18% increase a year ago.
In other words, the business is in a far stronger competitive position today. Investors shouldn't ignore that success when considering buying the stock.
Still profitable
Ulta remains highly profitable, too. Core operating profit did decline slightly compared to a year ago, but its margin is 17% today, down from 19% in early 2022. Target, for context, is struggling to push its margin back up toward the 6% of sales that the retailer enjoyed before the pandemic. In Ulta's case, though, profitability is much higher than it was in those days.
ULTA Operating Margin (TTM) data by YCharts
Management is forecasting a good year ahead for this metric, too. Operating income should land at around 15% of sales this year, down only slightly from last year's 16% result. "We remain confident in the resilience of the beauty category," CEO Dave Kimbell said in late May.
A beautiful price
If you're risk-averse, you might want to wait until after Ulta's Q2 report in August before buying the stock. Most Wall Street pros are looking for that announcement to show sales rising by about 9% while earnings improve to $5.80 per share from $5.70 per share a year earlier.
Management's commentary about the state of the makeup industry will likely be the main factor driving the stock's movement following that report. Wall Street's main worry is that deep discounting will push profit margins down further.
But patient investors can buy the stock now and take advantage of the current discount. Shares are priced at 2.2 times sales today, down from a price-to-sales ratio of closer to 3 last year. That's an attractive valuation for a retailer that's winning in a competitive industry and generating an over 15% operating profit margin.
