Ulta Beauty set for a breakout to new highs

Ulta Beauty Inc. NASDAQ: ULTA has grown into the largest beauty retailer in the United States. With nearly 1,400 stores, this consumer discretionary sector leader sells everything from cosmetics, fragrances and bath products to hair and skincare. 

Its products range from mass-market to high-end premium brands like The Estée Lauder Companies Inc. NYSE: EL, Coty Inc. NYSE: COTY and e.l.f. Beauty Inc. NYSE: ELF, along with exclusive offerings. While most of its customers are females, it has grown a dedicated men's section comprising grooming products for skin, hair, body care and colognes.

The average Ulta Beaty location is approximately 10,000 square feet, with nearly 950 sq. ft. dedicated to its salon. The company stays on top of the latest beauty and fashion trends and boasts a loyalty program that has grown to more than 42.2 million members since its launch in 2014.

Sharing the wealth 

As the nation's largest beauty retailer, Ulta has the scale to make or break new beauty brands. The company has engaged in an annual start-up accelerator program for new companies seeking to grow its beauty products business. Its Magnify, Uplift, Support and Empower (MUSE) Accelerator is an annual program that takes eight Black, Indigenous and people of color (BIPOC) beauty brands through a 10-week journey to prepare for retail distribution. 

The inclusivity program provides selected companies with a $50,000 grant and mentorships from BIPOC beauty founders and Ulta's merchandising partners to help accelerate business development. The program started in 2021 and has seen success stories, including Pound Cake Cosmetics, which secured its distribution at over 1,200 Ulta Beauty stores, Hyper Skin and KNC Beauty. Ulta doesn't disclose how many companies applied to the final cohort, but estimates range from hundreds to thousands.

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Surging ahead

Ulta Beauty reported a fiscal third-quarter 2023 EPS of $5.07, beating consensus analyst estimates by 11 cents. Gross profit grew 3% year-over-year (YoY) to $992.1 million versus $962.8 billion in the year-ago period. 

However, gross profit decreased to 39.9% compared to 41.2% in the year-ago period, driven by higher inventory shrink, higher supply chain costs, and merchandise margin compression, partially offset by strong growth in other revenue. Net interest income rose to $2.5 million due to higher average interest rates on its cash.

Revenues grew 6.4% YoY to $2.49 billion, beating $2.47 billion. Comparable same-store sales rose 4.5% YoY, compared to the 14.6% YoY growth in the year-ago period. Similar sales apply to stores open for at least 14 months. Comp sales for the quarter were driven by a 5.9% increase in transactions minus a 1.4% decrease in average ticket sales. Ulta closed the quarter with $121.8 million in cash and cash equivalents.

Rising inventories for rising demand 

Merchandise inventories grew 9.8% YoY to $2.3 billion, up from $2.1 billion in the year-ago period. However, this rise was due to support the expected demand of 31 net new stores, product cost increases, new brand launches and a new fulfillment center in South Carolina.

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Raising the low range of its guidance 

Ulta Beauty raised its lower range of full-year fiscal 2023 EPS guidance to $25.20 to $25.60 billion, up from $25.10 to $25.60 billion versus $25.34 billion consensus analyst estimates. 

It raised its full-year 2023 revenue guidance range to $11.10 to $11.15 billion, up from $11.05 to $11.15 billion versus $11.16 billion consensus estimates. It raised comparable sales to the 5% to 5.5% range, up from the forecasted 4.5% to 5.5% range.

CEO insights

Ulta Beauty CEO Dave Kimball reviewed the product segments. Makeup was flat, experiencing mid-single-digit growth. The fragrance segment experienced low double-digit growth. Haircare saw a decrease to the low single-digit range. 

CEO Kimball stated that skincare was "again" the fastest-growing category, experiencing double-digit growth in mass and prestige categories. He noted, "Beauty enthusiasts have maintained their skincare routines while also experimenting with new regimens. Consumer interest in moisturizers, serums and cleansers is driving growth, and brands leading into these trends like Drunk Elephant, Good Molecules and COSRX contributed to our strong results."

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Daily bullish pennant breakout to the bull flag 

The daily candlestick chart for ULTA illustrates a bullish pennant breakout followed by a bull flag pattern.

Its Q3 2023 earnings formed a breakaway gap of $465, peaking at $505.59. ULTA retested the gap-fill support at $465 on January 5, before forming a pennant of higher highs and higher lows. The daily relative strength index (RSI) bounce through the 55-band was the fuel that caused ULTA to break through the $484.28 descending upper trendline on January 25, surging shares to a high of $511.58 by January 30.

A bull flag of lower highs and lower lows followed, awaiting a breakout through the upper descending trendline again. The daily 50-period moving average (MA) support rose to $475.47, overlapping the ascending lower trendline of the pennant. Pullback support levels are at $475.09, $465, $439.87 and $427.80.