Ulta Beauty downgraded as TD Cowen cites medium-term challenges

By James Rogers

Ulta Beauty shares are down 1.6% in premarket trading Monday

Ulta Beauty Inc. was downgraded by TD Cowen Monday, with the analyst firm citing the increasing cost of competition for the specialty retailer.

"While [Ulta] remains a category leader with a scaled store base, we hold a more cautious medium-term view on recent lack of execution amid a slowing industry and increasing competition," TD Cowen analyst Oliver Chen wrote in a note released Monday. "To remain competitive, [Ulta] will need to continue to invest in exclusives, brand incubation, and its in-store experience, resulting in near-term margin deleverage until the company can successfully return to consistently positive growth."

Ulta Beauty's (ULTA) stock, which closed at $402.01 on Friday, has reached TD Cowen's price target of $395, and the analyst firm sees a lack of catalysts and upside to estimates heading into the retailer's Oct. 16 investor day. Set against that backdrop, TD Cowen downgraded Ulta Beauty to hold from buy.

Related: Ulta's stock slump after disappointing earnings is a buying opportunity, analysts say

Shares of Ulta Beauty were down 1.6% in premarket trading Monday. The stock is down 18% in 2024, compared with the S&P 500 index's SPX gain of 19.6%.

Of 32 analysts surveyed by FactSet, 14 have an overweight or buy rating, 16 have a hold rating and two have a sell rating for Ulta Beauty.

"Promo intensity, increased distribution points at Sephora & [Amazon] (AMZN), and category normalization are likely to persist for the next year," Chen wrote. Ulta Beauty also needs to execute on an online affiliate program to drive community and customer engagement and better utilize loyalty-program data to drive greater personalization and conversion, according to the analyst. "As the store count approaches the long-term target (1400 vs. 1500-1700 target), curation, innovation, and in-store experience are paramount to driving comps across categories," he said.

Related: Ulta Beauty's same-store sales take a surprising turn, and retailer's stock drops 7%

Chen noted that, while shrink has been flat in recent quarters, TD Cowen is concerned that in-store fixtures aimed at theft protection could create friction for shoppers.

Ulta Beauty reported worse-than-expected fiscal second-quarter results last month amid a surprise drop in same-store sales. The company also cut its guidance.

In a note released last week, Oppenheimer said that recent Ulta store checks in the greater Minneapolis and Milwaukee areas were positive. "[Ulta] continues to stand out with solid store conditions, incremental product newness, and seemingly strong execution during the 21 Days of Beauty event," Oppenheimer analyst Rupesh Parikh wrote in a note. "We still expect a volatile trade to continue for [Ulta] shares and would take advantage of any dips from here."

Related: Buffett sees beauty in Ulta, but Snowflake holding melts away

Ulta's latest 21 Days of Beauty event ran from Aug. 30 to Sep. 19. The event happens twice a year, in March and August.

Claudia Assis contributed.

-James Rogers

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09-23-24 0918ET

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