Stock Market Sell-Off: Is Ulta Beauty a Buy?

It is always interesting to check out the stocks that are massively higher when the market is down. Ulta Beauty (ULTA 0.56%), for example, has seen its shares rally 30% over the past year, while the S&P 500 Index is down 5%. Something good is going on. The big question is: Can it continue?

What a year

In a nutshell, Ulta Beauty posted very strong financial results in 2022, and investors rewarded it with a notable stock price advance. But it helps to put some numbers on this.

Revenue in 2022 increased 18.3% over 2021, hitting $10.2 billion, up from $8.6 billion in 2021. Comparable store sales increased 15.6% last year, which was actually down from 37.9% in 2021. That requires a quick explanation, as 2021 was really a rebound from pandemic-hit 2020 same store sales declines of 17.9%. On an absolute basis, a 15.6% same store sales increase is a result any retailer would be proud to report.

A person putting on makeup.

Image source: Getty Images.

Gross profit increased 20.1% year over year in 2020, with gross profit margin improving 60 basis points to 39.6%. Sales, general, and administrative costs rose 16.2%, but as a percentage of sales declined 40 basis points to 23.5%. Basically, these figures suggest that inflation is having an impact on the company’s costs, but that management is doing a pretty good job of offsetting the hit.

Going to the bottom line of the earnings statement, the company earned $24.01 per share in 2022, up 33.5% from the $17.98 it earned in 2021. These are all pretty good results that suggest Ulta Beauty is executing very well right now. 

So it shouldn’t be particularly shocking that the stock would do well. Helping with Wall Street’s perception of the shares is likely the fact that cosmetics are viewed as an affordable luxury that can be splurged on even during difficult and uncertain times. Thus, the fear of a potential recession in 2023 isn’t the same drag on Ulta Beauty’s stock performance as it might be for the broader market.

Where to from here?

One of the underlying strong points here is the company’s store openings. In 2020, despite the pandemic, it opened 10 net new locations. In 2021 that jumped to 44, and increased to 47 in 2022. New locations add to the top line. Ulta Beauty is looking to open another 25 to 30 stores in 2023.

New stores should support management guidance for sales between $10.9 billion and $11.05 billion, up from the $10.2 in 2022, for an increase of somewhere between roughly 7% and 8%. Comparable store sales are projected to increase between 4% and 5%, down from 15.6% last year. Earnings guidance calls for $24.70 to $25.40 per share, or an increase of between roughly 3% and 6%. That’s down from a 33.5% increase in 2022. The big story here appears to be that 2023 will represent a return to a more normal business environment. 

It is hard to suggest that the company’s guidance is bad, but will it be enough to keep the stock moving sharply higher? Ulta Beauty’s price-to-sales ratio is around 2.7, above the roughly 2.5 five-year average. Its price-to-cash flow ratio is 18.9, up from the longer term average of 18.4. And the price-to-book value ratio is about 13.9, way higher than the five-year average of 9.7. All of these valuation tools suggest the stock is expensive today. 

ULTA PE Ratio Chart

ULTA PE Ratio data by YCharts

The only metric that runs counter to this trend is the price-to-earnings ratio, which sits at 22.5, compared to a five-year average of 31.8 times. There was an outlier year over that span when the P/E ratio was unusually high, so a better comparison might be the five-year median, which is roughly 26.1. That still hints that the stock looks cheap, at least relative to its earnings, but highlights how the P/E metric has been biased higher by unusually high figures. This metric is likely to be less reliable in the current situation than, say, price to sales, which tends to be more consistent over time.

Don’t project this stock trend

At this point it looks like Ulta Beauty is set to have a solid year in 2023, though a far less spectacular year when compared to 2022’s results. So assuming management hits its goals, the company remains on a solid growth path.

But investors may have priced in a lot of good news based on the P/S, P/B, and price-to-cash flow ratios. Sure, the P/E is below the average, but it might be better to tread with caution than rely on that single valuation metric to justify extrapolating stellar performance, business wise and for the stock, too far into the future.