Fearing Soft Sector Trends, Ulta Beauty Shares Downgraded

Ulta Beauty Inc (NASDAQ: ULTA)'s nearly 15 percent sell-off over the past month could be the beginning of the stock's longer-term trend, analysts at Oppenheimer said. The firm's Rupesh Parikh downgrades the stock's rating from Outperform to Perform with a price target lowered from $330 to $270.

Ulta's stock weakness could be attributed to the possibility of Amazon.com, Inc. (NASDAQ: AMZN) jumping in to the beauty space — but this is only half the story, Parikh said in his downgrade note. The other half of the story is that the beauty market as a whole isn't as strong as many believe it to be.

France-based cosmetics company L'Oreal (L'Oreal SA (ADR) (OTC: LRLCY)) reported its earnings last week, which contained "softer commentary," the analyst explained. For example, the company acknowledged the beauty market in the U.S. is "less than [even] last year due to a much [softer] mass market." The company also said the beauty market has been "amazingly slow since January after a lively market in 2016."

"If our read of L'Oreal's assessment is accurate, this, coupled with increased department store discounting, could suggest a less robust US beauty market," the analyst said.

Based on a revised assessment of a now weaker beauty market, the analyst is predicting decelerating comp trends going forward. Ulta may need to become increasingly promotional, Parikh concluded.

A revised $270 price target assumes Ulta's stock will trade at a 13x multiple on the analyst's fiscal 2018 EBITDA estimate, which is a multiple that is merely in line with its historical average.

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