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Ulta Beauty's upcoming Analyst Day should serve as a positive catalyst: UBS

Published 10/02/2024, 07:37 AM
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ULTA
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Investing.com -- Ulta Beauty Inc's (NASDAQ:ULTA) upcoming Analyst Day is poised to act as a pivotal moment for the beauty retailer, with analysts at UBS forecasting it to be a significant positive catalyst. 

Despite recent challenges such as a slowdown in category growth and heightened competition, UBS analysts do not align with the market's pessimistic long-term outlook for the company. 

Instead, they see this event as an opportunity for ULTA to reset and communicate more achievable expectations.

UBS notes that while ULTA’s prior growth formula aimed for low double-digit EPS increases, it’s likely the company will now set a target of mid-single-digit to high-single-digit EPS growth. 

This shift, while representing a moderation, would still be sufficient to boost investor confidence, particularly if ULTA can present realistic targets for earnings and store growth while also capitalizing on opportunities such as a potential dividend introduction. 

UBS estimates that should ULTA report the midpoint of this growth range, it would suggest EPS of around $24.30 for FY 2025 and approximately $26.40 for FY 2026, modestly below current market expectations.

Moreover, UBS analysts flag several new growth avenues and margin drivers that ULTA didn’t possess a few years ago, including stronger free cash flow generation. 

They argue that even in a scenario of slower top-line growth, ULTA can continue to reward shareholders, particularly if a dividend is introduced, which could broaden the stock’s appeal to a wider base of investors. 

UBS suggests a potential dividend yield of 1% could be introduced, aligning ULTA with other mature retailers.

On the operational front, UBS expects ULTA to introduce a three-year financial framework, focusing on MSD to HSD EPS growth. 

This is likely to be driven by 2% to 4% comparable store sales growth, 2% non-comp sales growth (through new stores and other channels), and EBIT margins in the 12-13% range, with share repurchases adding roughly 3% to EPS annually.

In terms of competitive landscape, the analysts note that ULTA has faced intensified competition, particularly from the expansion of Sephora locations in Kohl’s stores.

However, they believe that the peak of this competitive pressure is behind ULTA, and the impact of new store openings should diminish over the coming years.

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