On Friday, Citi adjusted its stance on ULTA Salon (NASDAQ: ULTA), reducing the price target to $375 from the previous $400 while keeping a Neutral rating on the stock. The firm anticipates that the company will report a second-quarter earnings per share (EPS) below the consensus on August 29, after the market close, citing weaker comparable store sales and lower gross margins as the main drivers.
ULTA Salon is currently navigating through challenges such as softening industry trends and heightened competition from new market entries and existing players, which are impacting customer traffic.
According to Citi, ULTA Salon's efforts to maintain market share are expected to lead to an increased reliance on promotions and marketing investments in the second half of the year. Consequently, the firm predicts that management will revise the fiscal year 2024 guidance down to approximately $24.50, a decrease from the current guidance range of $25.20 to $26.00 and below the consensus estimate of $25.65.
Looking ahead, Citi suggests that on October 16, during ULTA's analyst day, the company may reduce its long-term margin targets from the 14-15% range to around 13%. This adjustment would reflect the company's strategy to invest in marketing, promotions, and foundational investments to remain competitive.
The firm also notes that with ULTA's stock price having increased by 17% since August 12, the risk/reward balance appears to lean towards the negative side as the company approaches its second-quarter earnings release.
Citi has initiated a 90-day negative catalyst watch on ULTA Salon, signaling caution in the near term due to the expected developments and adjustments in the company's financial outlook. This watch is set against the backdrop of the company's current market challenges and strategic responses.
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