Ulta Beauty Lowers Guidance, but Is There a Buying Opportunity With the Stock Down Nearly 25% off Its Highs?

Ulta Beauty (ULTA -0.58%) shares have lost some of their shine recently, with the stock off about 25% from its recent highs. The beauty products retailer highlighted some of the issues it was facing when it recently lowered its guidance in conjunction with its recent earnings report.

While the stock has recovered a bit, it is still way down from its highs. Let’s take a close look at its most recent earnings report and guidance and see whether now is a good time to buy the stock.

Lowered guidance

For its fiscal first quarter, ended May 4, Ulta’s revenue moved 3.8% higher to $2.7 billion. Same-store sales, meanwhile, rose 1.6% on top of a 9.3% increase a year ago. Transactions increased 1.3%, while average ticket edged up 0.3%.

Fragrance was a strong category delivering double-digit comparable-store sales growth, while skincare grew mid-single digits and haircare low-single digits. Makeup comparable-store sales were a weak spot, falling mid-single digits.

The cosmetics and beauty product retailer’s gross margin fell 80 basis points to 39.2% due to a lower merchandise gross margin from a higher promotion environment and higher inventory shrink. Inventory shrink is the loss of merchandise due to things like theft, damage, or cashier error, and retailers like Ulta have been more targeted by theft in recent years.

Earnings per share (EPS) fell from $6.88 to $6.47 due to a weaker gross margin and higher expenses.

Ulta also reduced its full-year outlook. It now expects revenue to come in a range of between $11.5 billion and $11.6 billion, with same-store sales growth of 2% to 3%. That’s down from a prior outlook of revenue between $11.7 billion and $11.8 billion, with same-store sales growth of 4% to 5%. Its EPS forecast was also lowered, being taken from a range of $26.20 to $27 to a new outlook of between $25.20 and $26.

The company said it expects comparable-store growth to be in the low-single-digit range in the first half of the year, accelerating to between 2% and 4% growth in the second half of the year. It sees the improvement coming from easier comparisons to last year, as well as sales initiatives and new products in the pipeline.

Management said it feels confident that growth will pick up in the back half of the year as it improves its digital platform, increases marketing, and relaunches its loyalty programs, combined with more new products.

Makeup is the company’s largest category at around 44% of sales, so the negative comps certainly hurt it results. The company is delving into partnerships and working with them to get their newest innovative offerings on its shelves. It’s also adding exclusive brands only found at its stores, including with Morphe, Live Tinted, Polite Society, Rabanne, and Wyn.

A person shops in a cosmetics store.

Image source: Getty Images.

Is it time to buy the stock?

Ulta has been one of the strongest specialty retailers over the years, given its mixture of mass and prestige brands that can be found in one store. Cosmetics, meanwhile, has always been a very resilient business even in bad economic times, so much so that sales have been known to increase during recessions due to “the lipstick effect,” where consumers will spend on small indulgences amid tight economic conditions.

The stock trades at about 15 times earnings, which is attractive for a largely consistent recession-resistant retailer.

ULTA PE Ratio (Forward) Chart

ULTA PE Ratio (Forward) data by YCharts

With the bar now lowered, Ulta should find itself in good shape to exceed expectations in the back half of the year. Longer-term, it is a solid growth compounder that can solidly grow same-store sales while still having expansion opportunities ahead of it. As such, I think investors can look to buy the stock with it off its recent highs.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Ulta Beauty. The Motley Fool has a disclosure policy.

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