Goldman Sachs upgrades Ulta Beauty to Buy on easing sector concerns

Investing.com -- Goldman Sachs (NYSE:GS) on Tuesday upgraded Ulta Beauty (NASDAQ:ULTA) shares to Buy from Neutral and lifted its price target to $423 from $384.

The Wall Street bank maintained a Neutral stance on ULTA since December 2022 due to concerns about the normalization of beauty industry sales and the company's market share in the prestige segment.

Now, the upgrade decision is driven by several factors. Goldman analysts believe that the beauty industry has likely reached a bottom in terms of sales normalization and market share losses.

They anticipate a 7% growth in the prestige beauty industry and a 3% growth in the mass beauty industry in 2024, as per data from Circana.

Moreover, analysts believe Ulta Beauty could report momentum in comparable store sales (comp) for the first quarter and fiscal year 2025, citing quarter-to-date trends that align with current guidance and a recent acceleration in sales.

Also, the retailer’s monthly active users have shown an upward trend since November 2024, with app downloads in February increasing by 9% year-over-year and a significant rise in search activity for "21 Days of Beauty."

Additionally, the analysts believe that competition could pose less of a challenge, noting improving trends for ULTA's new product introductions compared to Sephora.

They also suggest that fiscal year 2025 guidance might be conservative regarding margins, considering ULTA's history of posting better-than-expected selling, general, and administrative (SG&A) growth.

“Finally, we note tariff risk is low for Ulta, while the stock has seen pressure but proved resilient during recessionary periods,” analysts added.

Goldman sees Ulta’s valuation as attractive at 15.8x next twelve months (NTM) price-to-earnings (P/E), which is below its 3-year average of 17.9x.