Following cosmetics retailer Ulta Beauty's (ULTA.US) latest earnings report, UBS released a research note stating that Ulta Beauty is currently well-positioned with potential for further stock price appreciation. UBS noted that as Ulta Beauty continues to deliver strong quarterly results while maintaining conservative guidance expectations, the market is more likely to assign higher valuation multiples to the company.
UBS maintained a "Buy" rating on Ulta Beauty following the earnings report, raising its 12-month target price from $640 to $680, representing approximately 38% upside potential from the stock's Friday closing price.
UBS stated that Ulta Beauty's second-quarter performance was nearly flawless, with comparable sales growth of 6.7%, significantly exceeding the market consensus of 5%. This growth was driven by a combination of 3.7% transaction volume increase and 2.9% average ticket growth. While the beauty market showed improvement in the first and second quarters, Ulta Beauty's performance exceeded the broader industry. Most of the improvement came from better execution, new product launches, and other initiatives.
Additionally, Ulta Beauty achieved improvements across all store types, including stores without major new competitor openings, stores with only one competitor location, and stores with multiple new competitor locations. UBS believes these factors are highly favorable for business development in the second half of the year.
However, the company's guidance indicates a significant deceleration, with comparable sales growth expected to range from flat to low single digits. Given the uncertainties facing consumers and recent challenges experienced by Ulta Beauty, this cautious approach is reasonable. Nevertheless, UBS still believes the company is well-prepared to continue outperforming the industry and may further drive upward revisions to profit expectations.
Looking ahead to 2026, UBS stated that Ulta Beauty will benefit from additional growth drivers, such as the full rollout of third-party marketplace, expansion of "replenish and save" programs, and other revenue drivers. Furthermore, some investment spending will moderate. The company should be able to maintain 5-6% revenue growth and double-digit earnings per share (EPS) growth.
UBS added that as Ulta Beauty continues to exceed expectations on short-term fundamental targets, the company may revisit its long-term financial targets at some point in the future. This presents another potential positive catalyst for the medium term. Particularly, as peak investments in selling and administrative expenses gradually subside, there is potential for upward revision to the company's long-term margin targets (approximately 12%).
Moreover, compared to previous plans, accelerated international expansion may bring higher overall sales growth rates, combined with potential outperformance from new revenue channels such as UB Media and third-party marketplace, all of which are expected to continue supporting the company's double-digit EPS growth trajectory.