Magnificence Shares Acquire Floor After Ulta’s Warning. Why Some Analysts Are Nonetheless Bullish.
Cosmetics stocks got pummeled Wednesday when
warned that growth in the category was slowing more than expected. But the sector rebounded Thursday morning, nudged higher by some analysts’ recommendations for investors to take advantage of the dip.
Wall Street has long been fretting over a potential retrenchment in the beauty sector following three years of explosive growth in demand. On Wednesday, Ulta CEO Dave Kimbell seemed to affirm those concerns, saying that while 2024 sales of beauty products will remain “healthy,” growth will moderate to the mid-single-digit percentage range.
“What we’ve seen so far is a slowdown in the total category across price points and segments that’s a bit earlier and a bit bigger than we thought,” Kimbell said, speaking at a
investor conference.
Big-picture challenges, including rising credit-card debt and student loan repayments, have been weighing heavily on the consumers Ulta seeks to serve, Kimbell said, while competition has eaten away at the company’s market share.
Kimbell’s comments sent a shock wave through beauty stocks. Shares of Ulta closed 15% lower Wednesday, while
shed 12%,
dropped 4%, and
lost 6%.
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“We are unclear whether the deeper moderation lately is a blip or something more,” Oppenheimer analyst Rupesh Parikh wrote in a note Wednesday. “As a result, we are taking a more conservative stance for the balance of the year on the category and competitive backdrop.”
Parikh maintained an Outperform rating on Ulta shares, but slashed his target for the stock price to $500 from $600. He removed the stock from his list of top picks.
Yet all four stocks were up more than 1% in early afternoon trading Thursday, in recognition that the market’s knee-jerk reaction Wednesday may have been too drastic. Raymond James analyst Olivia Tong described the plunge as “overdone.”
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“Even with a slowing, we think beauty will remain among the highest growth consumer categories, and view these pullbacks as buying opportunities,” wrote Linda Bolton Weiser, an analyst at D.A. Davidson, in a note Thursday morning.
Tong said that Ulta and others in the beauty sector, particularly E.l.f, are pursuing a number of initiatives that could continue to drive healthy sales growth, albeit at a lower pace than in previous years. Tong has Strong Buy ratings on Ulta and E.l.f.
For Ulta, those include more brand launches and increased store openings, Tong said. And while competition is heating up—Kimbell called out Sephora’s rapid growth within
stores—Ulta could nab market share from department stores like
that are closing shop across the country, added Dylan Carden, an analyst at William Blair, who rates the stock at Outperform.
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Meanwhile, E.l.f.’s low prices could attract consumers of all income levels even if they decide to pare back on spending, Tong said. The company was one of the few to raise its forecasts for its fiscal year when it reported earnings in February. The company has had net sales growth of above 20% for more than 20 consecutive quarters.
“We continue to believe any softness in the category is fleeting and natural,” Carden wrote in a note to clients.
Write to Sabrina Escobar at sabrina.escobar@barrons.com
