Ulta Beauty Inc. stock (NASDAQ: ULTA) is up extra than 20% considering that the commencing of this yr, and at the existing cost of $341 per share, we think that Ulta Splendor stock has more than 10% probable downside.

Why is that? Our perception stems from the fact that Ulta Splendor inventory is up more than 1.5x due to the fact 2017 close, and just after a mixed the latest earnings craze, we consider Ulta Natural beauty stock could head decrease. Our dashboard What Things Drove 52% Transform In Ulta Beauty Stock Concerning 2017 And Now? offers the vital figures behind our thinking, and we clarify a lot more underneath.

Ulta Attractiveness is an American chain of splendor shops, whose stock value rise considering that 2017 came due to an 18% boost in revenues from $5.88 billion in FY 2017 to $6.92 billion over the past 4 quarters (Ulta’s fiscal yr ends in January). Mixed with a 9% fall in the exceptional share depend, RPS (revenue for every share) jumped from $95.60 in FY 2017 to $124.10 on an LTM basis.

Further more, Ulta’s P/S (rate-to-profits) ratio jumped from 2.1x in 2017 to 2.6x by 2020 conclude, and has because risen marginally to 2.7x at present. We imagine that provided Ulta’s mixed modern earnings functionality, there is a achievable downside possibility for the P/S multiple.

So what is the most likely trigger and timing to this draw back?

The global spread of coronavirus and the resulting lockdowns meant that there was a drop in demand for make-up and fragrance products as people today were being just not stepping out as typically. Having said that, with economies opening up and men and women starting off to get out of their houses, desire for cosmetic goods and fragrances has spiked. This is obvious from Ulta’s Q1 2022 earnings, wherever profits arrived in at $1.94 billion, up strongly from $1.17 billion for the exact same interval in FY ’21. Shrewd expense management observed Ulta’s functioning cash flow arrive in at $305 million, a sharp turnaround from the $101 million operating loss in Q1 2021. This observed EPS increase to $4.13 from -$1.39 over this time period.

Nonetheless, it is significant to observe that revenues in FY 2021 (at $6.15 billion) look weak when as opposed to people in FY 2020, which came in at $7.4 billion, and even when in comparison to the $6.72 billion in FY 2019. In spite of need and revenues mounting YoY in Q1 2022, given Ulta’s overall earnings and earnings pattern since FY 2019, combined with the continuing get the job done from residence pattern, we feel that the enterprise does not warrant such a large P/S a number of. Even though Ulta’s future Q2 2022 earnings will paint a clearer picture, we believe that that in the close to term the inventory will see its P/S multiple decrease from the latest degree of 2.7x to 2.3x, which even with currently being supported by a slight increase in revenues and margins, could consequence in the inventory selling price shrinking to as very low as $300, a downside of extra than 10% from the latest value near $341.

When Ulta Elegance Inc. stock may perhaps move reduce, it is valuable to know how its friends stack up. Ulta Elegance Inc. Comparison With Peers summarizes how Ulta Attractiveness compares towards peers on metrics that subject. You can locate a lot more this kind of beneficial comparisons on Peer Comparisons.

 

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