Finance
3 Reasons to Buy Ulta Stock Like There’s No Tomorrow
3 Reasons to Buy Ulta Stock Like There’s No Tomorrow – Investing is not always rational. It seems logical that you would want to buy a stock that is rising. That implies that things are going well and that there is reason to have confidence in its future potential. Sometimes this is the right way.
But if a stock is already posting high gains, that could indicate it has peaked. Conversely, stocks that are plummeting can be the key to successful investing with a recovery. It could be a risky strategy unless there are valid reasons to believe it could make a strong comeback.
When a stock is falling with every reason to outperform, that is an opportunity. Ultimate beauty (NASDAQ: ULTA) is a fantastic stock that typically beats the market and has incredible future potential, but is down 19% this year. Here are three reasons to buy it right now.
1. The differentiated model
Ulta has built itself into a powerhouse cosmetics company by breaking all the rules. It brings together luxury and mass brands, while the traditional setup divided these two segments into completely different markets. Ulta’s management recognized that the core of the “beauty enthusiasts” were stores from both segments, and that offering them under one roof was an untapped opportunity. It says that 66% of buyers are these enthusiasts, and they account for 83% of total sales.
Another way it stands out is that it offers services. Other brands all use similar models: luxury brands are sold in department stores, and mass-market brands are sold in pharmacies and supermarkets. Many brands have physical direct-to-consumer stores, a recent development in the cosmetics world, and today most brands also have digital direct-to-consumer channels. None of these setups are conducive to offering services like Ulta’s big-box stores, and services are an important part of the model. People who come in for services, such as hair or nail design, are much more likely to walk out with products. It’s a flywheel effect that leads to greater loyalty and higher sales.
Today, in addition to its own brands, Ulta carries hundreds of brands from different demographics to appeal to this customer, and loyal beauty publishers are its core market. Ulta has 1,375 stores nationwide and has launched a successful rollout of stores-within-stores at select stores. Goal locations.
At the end of 2023, it had 43 million members, an increase of 3 million compared to 2022, and these members account for as much as 95% of turnover. That gives Ulta enormous data to use in setting its agenda and the ability to understand and meet demand.
2. Don’t mistake its profitability
One of the factors leading to the decline in Ulta stock is a pressured operating margin. Ulta is feeling inflationary pressure in a number of ways; Revenue rose 3.5% from $2.6 billion last year to $2.7 billion this year in the first fiscal quarter of 2024 ended May 4, with a 1.6% increase in comparable sales. Earnings per share (EPS) fell from $6.88 last year to $6.47 this year. the operating margin fell from 16.8% to 14.7%. Management lowered its outlook across the board.
It’s important to keep in mind that Ulta has no debt and generates stable free cash flow. These are positive qualities that mean that the company is not in financial danger and functions efficiently. The decline in profitability is a result of external factors, and the company is going through a challenging time.
All businesses face challenges at different times. Investors shouldn’t panic about selling because of a tough quarter – or even several. If the investment thesis is intact and management deals effectively with short-term problems, persistence will ultimately reward you.
For new investors, the challenges could create a buying opportunity. Read more.
3. The dirt-cheap price
At the current price, Ulta is trading dirt cheap price-earnings ratio over a period of one year multiple of less than 14. That’s a steal when you put it in the context of Ulta’s potential.
This is the principle behind value investing. Value investors look for stocks that may be undervalued and are likely to rise to meet their true value.
Ulta is a well-managed company with a long-term competitive advantage thanks to its differentiated model that focuses on the beauty enthusiast. Trading is at a discount and this is an excellent time to buy shares.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Target and Ulta Beauty. The Motley Fool has one disclosure policy.
3 Reasons to Buy Ulta Stock Like There’s No Tomorrow was originally published by The Motley Fool
