Ulta Stock Rally: Is There Still Room for More Upside?

ULTA stock price

Most investors aren’t willing to consider a stock as a potential buy after a recent rally, failing to realize that most of Wall Street’s activity today is driven by algorithms that look for just this sort of price action. The so-called momentum in a breakout stock can trigger further buys down the line, leaving behind all of those who weren’t willing to get in during the early days of what could become a double-digit rally.

This is the case for an unlikely name today, an under-the-radar player in the consumer staples sector, despite most of the market describing it—and treating it—like a consumer discretionary name. The stock under question here is Ulta Beauty Inc. (NASDAQ: ULTA), a name that, despite its recent 12.2% rally on its latest quarterly earnings release, is still a buy for those who are looking to compound their capital over the long run.

Warren Buffett liked this stock enough to get behind it, and Ulta is a textbook Buffett stock for those willing to look inside its business model and financials. However bullish these metrics are, there are plenty of other reasons why investors should take a second look and consider this stock for their watchlists. As the United States economy might be headed into potential inflation pressures, Ulta’s products will remain in steadily growing demand.

What Ulta's Latest Earnings Reveal About the Stock Today

Not exactly great news, but Ulta's results were amazing compared to expectations in the middle of a slowing consumer cycle. With revenue increasing by only 1.7% and comparable sales, a highly important metric in the retail sector, rising by only 0.6% in the quarter, it doesn’t look like Ulta has much to attribute its 12% rally to.

Even gross profit margins lowered to 39.7% from 39.9% a year ago, so why is the market getting so excited about buying Ulta right now? This This is where context becomes all the more important for investors to consider in the coming quarters, and context says that despite a slight slowdown, Ulta is now the best alternative in the space.

With other consumer stocks posting lower revenue, earnings, and guidance, names like Target Co. (NYSE: TGT), which sold off by nearly 25% after earnings, Ulta’s steady financials show much better quality and safety as an investment. That is the context to keep in mind here as more buyers slowly trickle into the stock.

This is especially the case as potential trade tariffs could result in an inflation scenario for the United States economy, making discretionary items less of a consumer priority. Even if this is the case, consumers will like make room in their budgets for Ulta’s products, as they are an everyday necessity for most. Therein lies the catalyst for this investment.

Even with falling margins and marginal revenue gains, Ulta did post $5.14 in earnings per share (EPS) compared to $5.07 last year, a growth rate of up to 14% to justify the stock’s jump. But how does the company grow its EPS if everything else is down or flat?

Share buybacks: Management bought back up to $267 million worth of Ulta stock over the quarter and as much as $764.5 million during the past nine months. What’s more, up to $2.9 billion is available for further repurchases, meaning insiders believe the stock is cheap enough to buy at these prices.

What’s Next for Ulta Stock: Analyzing Future Upside Potential

For this one, investors have to consult Wall Street sentiment, starting with analyst ratings and price targets. As of today, the consensus is set for $421.7 a share, calling for only a 7.3% upside from today’s price. However, there are those willing to stand out from the pack, such as those from Canaccord Genuity Group, which has a renewed “Buy” rating.

As of December 2024, these analysts also placed a price target of $476 on Ulta stock, implying a much bigger upside of up to 21.2%. Interestingly, only six months ago, in June 2024, the price targets on Ulta stock were set at a much higher $507 a share, and not much has changed in the business since then.

One thing that has not changed is that margins are industry-leading and that over 90% of Ulta sales come from loyalty membership programs, an unprecedented number in the retail industry. This level of retention and market penetration is what Warren Buffett would call a business's “moat,” and it is probably what got him looking at Ulta.

This retention, plus Ulta's predictability and stability in business, is also reflected in the company’s financials, especially through the returns on invested capital (ROIC) rates of up to 28.2% as of the past 12 months.

ROIC is the foundation for a stock that could become a wealth compounder, as annual stock price performance tends to match the average ROIC over the long term.

Wall Street Analyst Weigh In

Several equities analysts have commented on TGT shares. JPMorgan Chase & Co. lowered their target price on Target from $167.00 to $139.00 and set a "neutral" rating on the stock in a report on Thursday, November 21st. Telsey Advisory Group reiterated an "outperform" rating and set a $195.00 price target on shares of Target in a research note on Wednesday, November 20th. Sanford C. Bernstein initiated coverage on shares of Target in a research report on Tuesday, October 22nd. They set a "market perform" rating and a $168.00 target price for the company. Royal Bank of Canada boosted their price objective on Target from $174.00 to $177.00 and gave the stock an "outperform" rating in a research note on Thursday, August 22nd. Finally, Wells Fargo & Company decreased their price target on Target from $180.00 to $150.00 and set an "overweight" rating on the stock in a report on Wednesday, November 20th. One investment analyst has rated the stock with a sell rating, seventeen have given a hold rating and fifteen have assigned a buy rating to the company. According to MarketBeat, the company presently has an average rating of "Hold" and a consensus price target of $160.30.

View Our Latest Analysis on Target

Target Trading Down 0.7 %

The stock has a 50 day moving average price of $147.38 and a 200-day moving average price of $147.91. The company has a current ratio of 0.94, a quick ratio of 0.25 and a debt-to-equity ratio of 0.99. The stock has a market capitalization of $59.17 billion, a PE ratio of 13.79, a P/E/G ratio of 2.16 and a beta of 1.17.

Target (NYSE:TGT - Get Free Report) last announced its quarterly earnings results on Wednesday, November 20th. The retailer reported $1.85 EPS for the quarter, missing analysts' consensus estimates of $2.30 by ($0.45). The business had revenue of $25.23 billion during the quarter, compared to the consensus estimate of $25.87 billion. Target had a net margin of 4.06% and a return on equity of 31.11%. The firm's revenue was up .9% on a year-over-year basis. During the same period in the previous year, the business posted $2.10 EPS. Sell-side analysts expect that Target will post 8.6 earnings per share for the current year.

Target Announces Dividend

The firm also recently declared a quarterly dividend, which will be paid on Tuesday, December 10th. Investors of record on Wednesday, November 20th will be issued a $1.12 dividend. The ex-dividend date of this dividend is Wednesday, November 20th. This represents a $4.48 annualized dividend and a yield of 3.47%. Target's dividend payout ratio (DPR) is presently 47.51%.

Insider Buying and Selling

In other Target news, insider Richard H. Gomez sold 6,348 shares of the stock in a transaction that occurred on Friday, September 27th. The stock was sold at an average price of $157.17, for a total transaction of $997,715.16. Following the completion of the transaction, the insider now owns 123,551 shares of the company's stock, valued at $19,418,510.67. This represents a 4.89 % decrease in their ownership of the stock. The sale was disclosed in a legal filing with the Securities & Exchange Commission, which is available through this hyperlink. 0.15% of the stock is owned by corporate insiders.

Target Company Profile (NYSE:TGT)

Target Corporation operates as a general merchandise retailer in the United States. The company offers apparel for women, men, boys, girls, toddlers, and infants and newborns, as well as jewelry, accessories, and shoes; and beauty and personal care, baby gear, cleaning, paper products, and pet supplies.