Ulta Beauty Continues to See Strong Demand. Inflation Isn’t Pushing Shoppers to Buy Cheaper Options.

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Ulta Beauty continues to see strong consumer demand.


The big news in retail this past week was Target’s announcement that it was cutting its forecast again, just three weeks after the company’s downbeat fiscal first quarter. Yet as Barron’s noted, other less high-profile retailers were doing much better. Add cosmetics high flyer Ulta Beauty (ticker: ULTA) to the list, as the company continues to see strong consumer demand.

Target (TGT) noted that ongoing discounting would hurt margins. With supply chains still causing havoc throughout the industry Target, along with others, over-ordered inventory to ensure they had goods on shelves to sell to consumers and avoid out-of-stock scenarios that have been too common throughout the pandemic. Unfortunately, they did so just as consumers were shifting away from many products, especially casual and basic clothing, that dominated in recent years.

That left it with too much merchandise on its hands, and led to worries that other retailers would be forced to join Target in discounting. Once again, the sector sold off.  

That’s not the whole story however. While Target dominated the headlines, there was plenty of good news this week: We noted that Tractor Supply (TSCO) reiterated its outlook, Academy Sports and Outdoors (ASO) struck an upbeat tone with its earnings, and Signet Jewelers (SIG) delivered a beat-and-raise quarter, with its CFO saying the company was able to sidestep supply chain woes.

Given how quickly the situation is changing on the ground—both Walmart (WMT) and Target were caught off guard by changing consumer patterns and gas prices continue to soar, pushing up record inflation—investors have been keen for reassurances from companies that their recent forecasts aren’t under threat.

Ulta seemed able to do so. Although the company didn’t provide a formal update from its latest strong quarter reported in late May, executives hosted analysts in New York City, and they came away encouraged by the meeting.

“Management’s tone was bullish on Ulta’s growth opportunities, similar to when it reported significantly better than expected results two weeks ago,” writes Raymond James analyst Olivia Tong, who has an Outperform rating and $475 price target on the shares.

She notes that the company isn’t immune to the many macro challenges swirling around the industry, but writes that the company hasn’t seen consumers trading down to cheaper options amid inflation—a trend echoed by other companies as well. “Should the environment become more challenging, we expect a number of options will come into play to improve value for the consumer without rolling back price increases,” she notes, including marketing and merchandising shifts.

Jefferies analyst Stephanie Wissink reiterated a Buy rating and $475 price target as well. She notes that “Ulta’s prominence in the industry, brands are prioritizing inventory for the company and in-stock rates continue to improve,” which puts it at an advantage at time of supply chain constraints.

Ulta shares are up about 22% in the past 12 months to a recent $412.61.

Wissink was also happy to hear that the company isn’t seeing any “shift from experimental products to necessities, indicating exploration and creativity among consumers is continuing despite potential wallet tightening.”

Likewise D.A. Davison analyst Michael Baker reiterated a Buy rating and $490 price target. “We came away feeling confident in Ulta’s business moving forward,” he writes, as the Target partnership is bringing more customers to the brand and that the promotional environment for beauty has been relatively benign, with discounts falling year-over-year in the first quarter, and compared with prepandemic levels.

Barron’s highlighted beauty retail as a bright spot in the industry, following strong earnings from Ulta and e.l.f. Beauty (ELF).

Write to Teresa Rivas at teresa.rivas@barrons.com