Why Ulta Beauty Stock Sank Today
Shares of cosmetics retailer Ulta Beauty (ULTA -13.02%) sank on Friday after the company reported financial results for the fiscal first quarter of 2023. As of 1:10 p.m. ET, Ulta Beauty stock is down 13%.
In Q1, which ended in April, Ulta Beauty had net sales of $2.6 billion, up 12% year over year thanks to a 9.3% increase in same-store sales. Admittedly, the company’s net sales were slightly below Wall Street’s expectations, but I don’t believe that’s why the stock fell today. The issue seems to be related more to profitability.
Ulta Beauty’s Q1 operating margin was 16.8% — a substantial drop from its operating margin of 18.7% in the same quarter of last year. In fairness to the company, its operating margin was at an all-time high last year. And a margin of 16.8% is still quite good, as the chart below shows.
Still, with sales up and profit margins down, the end result for Ulta Beauty is that its operating income was up only 1% year over year. And the market didn’t appear to like that today.
For the rest of fiscal 2023, Ulta Beauty’s management raised its guidance for net sales but lowered its guidance for its operating margin. Previously it was guiding for an operating margin of 14.7% to 15% but it now expects a margin of 14.5% to 14.8%. Management did specifically cite a rising trend of organized theft as one of the factors driving profits down. And that’s a problem that many discretionary retail companies are struggling to solve.
The silver lining for Ulta Beauty is that it has robust profits in the first place. And it’s using those profits to repurchase shares, which grows earnings per share. It spent nearly $300 million in Q1 repurchasing shares and has over $800 million of authorization remaining.
Moreover, Ulta Beauty is still opening new stores and growing sales per location. Therefore, there are multiple ways the company can create value for shareholders over the long term. In my opinion, the market is fretting over a minor issue today when looking at the bigger picture, which might create a buying opportunity for this long-term market-beating investment.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Ulta Beauty. The Motley Fool has a disclosure policy.