A Covid-19 vaccine won't help solve Ulta Beauty Inc.'s (ULTA, Financial) problem: running out of profitable investment opportunities to maintain sales growth momentum.
That's according to equity analyst John Zolidis, who traces Ulta's growth problem back to well before the Covid-19 pandemic began.
"Ulta Beauty is not the recovery and growth play the bulls want it to be," he said. "ULTA shares are trading near a 52-week high (despite much lower financial forecasts than a year ago) on a misguided investment case rooted in a nostalgia for ULTA's past performance that isn't coming back."
Meanwhile, Ulta Beauty has a negative economic profit. This means the company destroys rather than creates value for its shareholders.
| Company | Ulta Beauty |
| Three-year revenue growth | 18.1% |
| 3-year Ebitda growth | 14.4% |
| Current operating margin | 6.68% |
| Economic profit (ROIC-WACC) | -1.17% |
| Current price | $283.18 |
| Current intrinsic value | $265.41 |
Zolidis' comment follows Ulta Beauty's report of third-quarter financial results that beat management's expectations earlier this week.
"Today, we reported financial results that exceeded our expectations as we continue to navigate a year of uncertainties with agility and strength," CEO Mary Dillon said.
Zolidis makes his case against Ulta bulls by pointing to the decline in the unit growth, from 9.2% back in fiscal 2018 to 2% in fiscal 2020.
He then referred to a shift in consumer spending away from the beauty category.
"In the past, when ULTA was a great stock, the company benefited as the growth in consumer spending on beauty outstripped overall consumer spending," he said. "This trend was shifting substantially well before Covid-19, and YOY total beauty category sales fell year over year at ULTA (despite store growth) for the first time in the fourth quarter last year."
Simply put, Ulta cannot return to the old high growth days unless consumers increase their spending on beauty products.
Meanwhile, Zolidis thinks the Covid-19 pandemic has intensified competition in the beauty industry, as sales have shifted from stores to online.
That's where Ulta is facing stiff competition from Amazon (AMZN, Financial). While Ulta's management seems to acknowledge the problem of growing online competition, they have been re-assuring for the bulls.
"We know guests are changing how they shop beauty, but importantly, their engagement with the category remains strong," Dillon said. "As a well-loved brand curating all things beauty, all in one place, we take great pride in our responsibility to lead the industry and redefine beauty experiences for guests, inclusive of safety measures. As the prevalence of COVID-19 increases across the country, we will continue to monitor closely and adjust operations as needed to ensure the safe delivery of beauty essentials."
Meanwhile, equity analysts will be closely monitoring the company's strategy to return to growth once vaccines put an end to the Covid-19 pandemic.
Disclosure: I don't own any shares of Ulta Beauty.
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