1 Growth Stock Down 34% to Buy Right Now

The ultimate beauty (ULTA 2.44%) has been one of the best performing consumer discretionary stocks in the market throughout its history.

The company has established itself as a clear leader in a unique retail niche, selling more than 25,000 products from more than 600 brands and operating in-store hair salons, setting it apart from rivals like Sephora.

Since its initial public offering (IPO) in 2007, Ulta has risen more than 1,000%, but over the past year, the stock has hit a snag. The stock is down 24% year to date, and the stock looks cheap enough to attract the attention of Warren Buffett, whose Berkshire Hathaway picked up some Ulta stock in the second quarter, though the stock is even cheaper now than it was when Berkshire bought it.

Ulta has recently fallen 34% from its peak earlier this year, and for good reason, as sales have weakened due to the company’s previously strong growth rate. Let’s explore Ulta’s recent challenges before discussing why it presents such a compelling buying opportunity.

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Ulta hits a wall

The Ulta stock sale is not unwarranted. In the second quarter (ended Aug. 3), comparable sales fell 1.2 percent, a significant deceleration from the 8 percent gain it posted in the year-ago quarter, and revenue rose just 1 percent, to $2.55 billion, missing the consensus at $2.61 billion. . This poor performance continued a trend from the first quarter.

Profitability was also affected, with gross margin falling to 38.3% from 39.3% due to increased markdowns and selling, general and administrative expenses increasing from 23.7% to 25.3% from revenues, which resulted from the deduction from the decrease in comparable sales.

As a result, operating margin fell from 15.5% to 12.9%, and earnings per share fell from $6.02 to $5.30, below estimates of $5.47.

Ulta also lowered guidance for the full year. It now sees comparable sales down 2% and revenue flat and down from $11.5 billion to $11.6 billion to $11 billion to $11.2 billion. It also cut its earnings per share from $25.20-$26 to $22.60-$23.50.

Management said a decline in comparable-store transactions hurt the business, due to slower growth in the beauty industry and increased competition affecting Ulta’s share of prestige beauty. The impact is particularly strong when new stores open nearby.

Ulta also appears to be losing market share to Sephora, which reported double-digit growth in revenue and profit globally. Sephora also mentioned the impact of its new partnership with Kohl’s.

Why Ulta May Come Back

Most of Ulta’s challenges appear to be temporary. The impact of new nearby store openings tends to be strongest when they first open, enticing consumers to try something new, but Ulta’s loyalty program remains strong. Rewards members grew 5% from a year ago to 43.9 million, which should help drive its long-term growth.

Management also said new stores are performing well and continues to aggressively open stores, with 60 to 65 new stores expected this year, in addition to its base of about 1,400 locations. Clearly, the company believes there is still room to expand and penetrate the market.

It’s a mistake to see two quarters of poor results as evidence of a broken company, and discount Ulta offers a good buying opportunity as it now trades at a forward price-to-earnings ratio of 16.

For a company with Ulta’s history of growth and success, as well as market opportunity, that seems like a great price to pay.

If you can look past the current challenges, Ulta should be in a better place in a year or two, as most of the problems it faces appear to be temporary. In addition to store openings and the tide of receding competition, the business should benefit from falling interest rates, which will encourage consumer spending. All in all, Ulta seems like a good bet for recovery.