Retail

Ulta Beauty shares rally on earnings beat, but analysts see weak cosmetics sales ahead

Key Points
  • Ulta Beauty beats quarterly profit estimates on Thursday.
  • Results are driven by sales of higher-margin cosmetics products.
  • The retailer has capitalized on booming demand for premium celebrity-led beauty brands and has attributed cosmetics lines from Kylie Jenner and YouTuber James Charles for driving customers to its stores.
Kylie Jenner visits Houston Ulta Beauty to promote the exclusive launch of Kylie Cosmetics with the beauty retailer, on November 18, 2018 in Houston, Texas.
Rick Kern | Getty Images

Ulta Beauty beat third-quarter profit estimates on Thursday, driven by sales of higher-margin cosmetics products, sending the retailer's shares up nearly 13% during midday trading Friday.

Ahead of the earnings report, investors had been worried that the retailer would see weaker makeup sales, but the nearly 30-year-old company has capitalized on booming demand for celebrity-led beauty brands, which are usually priced at a premium. Ulta has attributed cosmetics lines from Kylie Jenner and YouTuber James Charles for driving customers to its stores.

In the latest quarter, Ulta reported net income of $129.75 million, or $2.25 per share, compared with earnings of $131.17 million, or $2.18 per share, in the same quarter last year. Analysts expected the company to earn $2.13 per share, according to Refinitiv consensus estimates.

Revenue rose to $1.68 billion from $1.56 billion a year ago but was slightly lower than the $1.69 billion analysts expected. But the company matched same-store sales growth forecasts of 3.2%.

Ulta narrowed its full-year earnings outlook to a range of $11.93 to $12.03 per share from its previous forecast of $11.86 to $12.06 per share.

Wells Fargo analyst Ike Boruchow raised his price target to $250 from $235 per share. Ulta shares were recently trading around $267. He expects the stock to trade higher in the near term but sees further challenges ahead for the company.

"We believe that slowing cosmetic trends and shifting industry dynamics will meaningfully pressure the business, even as they generate robust comps for the broader retail space," said Boruchow in a note Thursday. He added that the stock will likely remain a "highly debated stock in the near-term."

Nomura analyst Michael Baker similarly increased the stock's price target to $230 from $215, saying the earnings were "not as bad as feared." He reiterated a "reduce" rating on the stock, saying he expects sales of color cosmetics to remain weak at least into mid-2020. The category is the most important one to the beauty retailer.

As a result, Baker expects the company will be forced to cut its earnings forecast in the future.

Ulta is one of the top-performing S&P 500 components since the start of the bull market in 2009. Its shares are up about 8% year to date.

— CNBC's Michael Bloom and Reuters contributed to this report.