Trading Nation

How billionaire Kylie Jenner could drive Ulta earnings this week

Key Points
  • Kylie Jenner announced an exclusive distribution deal with Ulta in November
  • Ulta has zero sell ratings on the Street and an average price target of $323
  • The stock is up 38 percent off the December lows and less than 3 percent from all-time highs
Ulta Beauty is set to announce earnings—Here's what three experts say investors should watch

When beauty retailer Ulta reports earnings Thursday, Wall Street will be watching for two key words in the results – Kylie Jenner.

The billionaire social media mogul launched an exclusive brick-and-mortar distribution deal for her Kylie Cosmetics line in Ulta stores last November. The popular assortment of lip kits and color cosmetics is currently valued at around $800 million and has continually attracted both consumers and investors to Ulta. The retailer's stock is up 29 percent just this year and is one of top-performing stocks in the S&P 500 off the December lows – up 38 percent.

Here's what top analysts are watching for in the report:

The "Kylie Jenner" effect

Stephanie Wissink, senior research analyst at Jefferies notes that due to Jenner's wide-reaching social influence, the decision to pick Ulta as the sole brick-and-mortar distributor for Kylie Cosmetics gave the retailer a "stamp of approval" as the hub for the cosmetics shopping experience.

"I think there is going to be an increasing number of properties and brands that are seeing Ulta that way and for Kylie in particular as she expands her assortment," Wissink told CNBC. "I think if we start thinking about Ulta more as a connectivity concept versus just a retail transactional venue [it] could really start to push the bounds of valuation and value creation within the beauty market place."

Dana Telsey — founder of Telsey Advisor Group — currently holds the highest price target for Ulta at $360. Telsey believes the popularity of Kylie Cosmetics has helped contribute to Ulta's closely watched same-store sales and will "continue to drive the business" as the retailer seeks to take advantage of its large customer base.

"I've seen that when the Kylie products got put into Ulta on Nov. 17, they've [still] been running out of some of the selections and some of the palettes," she said. "The beauty bloggers and micro influencers are the new ambassadors of brands and you want to be connected to those micro influencers because they bring you customers."

J.P. Morgan's Chris Horvers notes that while the initial launch of Kylie Cosmetics featured a limited selection of in-store items, investors should watch for tweets by Jenner which are likely to announce an expansion of product availability.

"You come in with something small you sell it out, you create that scarcity value. I think that sets the stage for further expansion," Horvers said. "So we think it's coming. I'm not sure if it's [this] week but we definitely expect more and more product from Kylie over 2019."

Key drivers

Ulta's ability to keep up with new product assortments and a lack of any near-term competitive threats act as positive catalysts for the company, according to Jefferies' Wissink. Telsey highlights growth potential in Ulta's salon services which attract some of the retailer's highest spenders. Horvers warns of a broader slowdown in color cosmetics demand, which makes up 51 percent of Ulta's business segment. According to Horvers, while the company's latest investment in its services and sudden rise in skin care product demand create growth opportunities, margin pressure should be expected as Ulta invests more heavily in these areas.

Wall Street expectations

Ulta currently has 16 buy ratings and zero sells among Wall Street analysts, according to FactSet. The average price target is $323.24 with shares currently trading less than 3 percent away from its all-time highs.

The company's stock is expected to move around 7 percent in either direction when it reports fiscal fourth-quarter earnings Thursday after the bell, according to Susquehanna's Stacey Gilbert, and she notes the options market suggests the rally is expected to continue. However, a recent slowdown in volume implies investors who've cashed in on Ulta's run are "kind of taking a pause here."

For those trying to play the move, Gilbert sees "opportunity here for investors who are concerned heading into earnings that there could be a pullback, that the risk-reward for those puts is attractive."

Shares of Ulta were trading around $315.50 midday Wednesday.