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Bear of the Day: Ulta Beauty (ULTA)

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Ulta Beauty (ULTA - Free Report) , the $15 billion brick-&-mortar phenomenon in retail cosmetics and salon services, delivered Q2 results on August 29 that didn't give investors the glow they were looking for.
 
The company produced 12% revenue and 12.2% EPS growth (both lower than expected) and +6.2% comparable sales. But it was the outlook that surprised to the downside.
 
Besides slight misses on both the top and bottom lines, ULTA guidance was weaker than expected. Management cut their FY19 EPS view to $11.86-$12.06 from $12.83-$13.03.
 
And they see FY19 total sales growth of 9%-12%, vs consensus of +12.2% to $7.54B. ULTA also cut its FY19 SSS (same store sales) growth view to 4%-6% from 6%-7%.
 
This news caused analysts to take down current fiscal year EPS (ending January) from $12.95 to $11.96, for a 7.7% downward revision. And next year's profit consensus dropped 10.8% from $15.02 to $13.60.
 
That's why ULTA is a Zacks #5 Rank Strong Sell now.
 
Beyond the downward revisions in growth estimates, let's take a look at some of the commentary and price target moves from analysts following this Q2 report...
 
Downgrades to the Growth Outlook
 
Morgan Stanley: Ulta Beauty downgraded to Equal Weight from Overweight at Morgan Stanley. Analyst Simeon Gutman also lowered his price target for the shares to $275 from $395. The analyst sees the company's Q2 earnings miss and lowered guidance as "thesis-changing", with growth slowing "meaningfully." Gutman was especially caught off-guard by the SSS comps guidance because he had just upgraded ULTA prior to this report looking for mid-to-high single digit comps and a "longer runway" for store growth. These drivers are no longer in place.
 
Wells Fargo: Analyst Ike Boruchow downgraded Ulta Beauty to Market Perform from Outperform and lowered his price target for the shares to $235 from $350. Slowing cosmetic trends and shifting industry dynamics will "meaningfully pressure" Ulta's business, Boruchow told investors in a post-earnings research note. The analyst believes the "highly competitive" cosmetics industry is currently seeing decelerating trends.
 
Stifel: Analyst Mark Astrachan lowered his price target for Ulta Beauty to $250 from $315 saying the company reported disappointing Q2 results, with comp growth below consensus. Astrachan sees the quarter as a a "meaningful change" in outlook, suggesting slowing share gains, risk to long-term expectations for comp growth and operating margin leverage, and nearer-term challenges, including difficulty in achieving stronger sequential comp growth in Q4. 
 
UBS: Analyst Michael Lasser lowered his price target on Ulta Beauty to $300, saying its Q2 results and outlook suggest that some "industry headwinds" cannot be overcome. The analyst notes that the 6.2% comp in Prestige brand marked a 240bps deceleration on a 2-year stack basis, adding that the trends have decelerated further in the past two months. But Lasser remains positive on ULTA shares noting that while the management lowered its SSS guidance to 4%-6% from 6%-7%, the reset may relieve the pressure out of end-of-quarter promos. 
 
Telsey Advisory: Analyst Dana Telsey lowered her price target for Ulta Beauty to $330 from $375 while maintaining an Outperform rating on the shares. In her note, Telsey explains that current innovation headwinds to the cosmetics category have been steeper than expected, overtaking Ulta's ability to share-gain its way to prior comp expectations. The veteran retail analyst added that despite recent disappointing recent cosmetic trends, she still sees ULTA gaining share and maintaining the potential for mid-single digit comp growth and double-digit earnings growth this year.
 
Credit Suisse: Analyst Michael Binetti maintained an Outperform rating on Ulta Beauty, but lowered his price target on shares to $286 from $380 following the company's Q2 EPS miss and lowered FY19 EPS guidance. The analyst noted that he was unclear as to why Ulta Beauty cut its second half guidance "so significantly after what sounds like a very short-term change in the trend line."
 
Oppenheimer: Ulta Beauty removed from Top Pick status at Oppenheimer. Analyst Rupesh Parikh removed Ulta Beauty as one of its Top Picks, but maintained an Outperform rating and $310 price target on the shares, following the company's "softer-than-expected" Q2 earnings results. While the analyst expected a comp shortfall, he did not expect the FY19 guidance reduction. Parikh views the 20%-plus sell-off as directionally appropriate, but suggested "longer-term players should take advantage of the weakness."
 
Bottom line for ULTA: The company is clearly a category winner in the beauty business, but is going through another growth hiccup. With shares finding support at $240 this month there is a case to be made for a bottoming process here. We just need to see estimates turnaround going into the holiday quarter. The Zacks Rank will let you know.
 
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