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A bet on luxury should pay off for Ulta Beauty over the long haul, according to Loop Capital. Analyst Anthony Chukumba upgraded the beauty stock to buy from hold, highlighting its push into the luxury market and Target shop experiences. ULTA YTD mountain Ulta Beauty shares in 2023 “We believe the nascent luxury brand expansion represents a multi-year comparable sales growth driver,” by luring new customer and encouraging others to trade up, he said. “We also think the continued rollout of Ulta Beauty at Target shop-in-shops will drive incremental income as well as Ultamate Rewards memberships.” After outperforming the broader market during 2022’s equities slump, Ulta shares have pulled back 9.4% year to date. Loop lifted its price target to $520 from $490 a share, reflecting 22% upside from Monday’s close. Chukumba called Ulta’s shop-in-shops experience an attractive economic move given that Target fronts the build outs and purchasing inventory, while the beauty company collects sales-based commission. Like many retailers, Ulta’s fallen victim to inventory shrink resulting from heightened retail crime and the easy ways to sell stolen items online. This headwind to profit margins should ease as the company adds glass cases to fragrances, amps up security and loss prevention teams, and better trains employees. “We think this profit margin headwind will dissipate over time given the myriad steps management is taking to aggressively address shrink,” he said. Looking ahead, Chukumba views a dividend as likely as a means to attract incremental income investors while also continuing its return of strong free cash flows to shareholders. “We expect the company to continue aggressively buying back stock for the foreseeable future and would not be surprised to see management take advantage of the recent weakness to ramp up repurchases even more in the near term,” he wrote. — CNBC’s Michael Bloom contributed reporting
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