- ULTA stock is off almost 20% in the past month.
- The drop-off plunges ULTA's valuation to a 52-week low.
- The fundamental growth story remains intact.
- The pullback is a great opportunity to enter a quality name at a relative discount.
Once a darling of Wall Street, Ulta Beauty (NASDAQ:ULTA) has suddenly and surprisingly turned into an ugly duckling. ULTA stock is down 17% over the past month. The big catalysts have been concerns regarding Amazon (AMZN) and cosmetic product discounting at department stores.
ULTA data by YCharts
This sell-off, though, looks like a compelling "buy the dip" opportunity into one of the best retail growth stories on Wall Street.
ULTA has all the makings of a "buy the dip" stock. Firstly, the valuation is cyclical. The P/E multiple has cycled between ~27.5x and ~47.5x over the past 3 years.
Secondly, the current 35.9x trailing P/E multiple is a relative valuation trough in this cycle. This is as cheap as the stock has been since a few months into 2016, when the stock was under $175 (it's now $255). This sharp of a drop in the P/E multiple (from 42.5x to 35.9x in just a few weeks) hasn't really been seen in the stock since early 2016, when the multiple compressed from ~40x to ~32.5x. That dip was a tremendous buying opportunity.
ULTA data by YCharts
Thirdly, nothing has materially changed regarding the ULTA growth narrative. This is the same stock that reported a blowout quarter less than 2 months ago.
Total sales were up 23%. Comps were up 14%, including a ~9% uptick in transactions and a ~5% increase in average ticket. Retail comps jumped 11%. Salon comps rose 10%. E-commerce sales were up 71%. Operating margins expanded 60 basis points. EPS roared 41% higher year-over-year.
Has anything really changed since then? Not really. All of the secular trends that have propped up ULTA stock over the past several quarters remain in-tact. In fact, the "selfie generation" trend has actually gained momentum. Snapchat (SNAP) now has about 170 million daily active users, while Facebook's (FB) Instagram Stories has 250 million daily active users. In other words, more people than ever are watching and posting ephemeral photos and videos of themselves. That's a huge tailwind for the cosmetics industry.
All in all, ULTA has all the attributes of a "buy the dip" stock. The valuation is cyclical, the valuation is currently at a low in that the cycle, and the fundamental growth story remains in-tact. We think this is a compelling opportunity to enter a hyper-growth stock at a relative discount.
This article was written by
Analyst’s Disclosure: I am/we are long ULTA, FB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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