On Friday, Wells Fargo (NYSE:WFC) maintained an Underweight rating on ULTA Salon (NASDAQ: ULTA) but increased the stock's price target from $400.00 to $450.00.
The firm noted that while ULTA's fourth quarter results were satisfactory compared to buy-side expectations, the company's forecast appeared less promising, especially with a weak start anticipated in the first quarter in terms of revenue and margins, as well as a second-half-weighted plan.
ULTA Salon's fourth-quarter performance included a beat on comparable store sales and gross margins, and the company's full-year outlook suggests what the analyst described as an "algo year."
Despite these positive aspects, the firm's stance remains cautious. The report highlighted that comparable store sales are on a downward trend, and gross margins are expected to continue declining, based on first-quarter and full-year commentary.
The updated price target reflects a view that ULTA's numbers are not particularly compelling when weighed against the stock's significant rise of 50% since November 1, compared to the S&P 500's increase of 20%.
The analyst expressed concern over the full-year guidance, which implies a "hockey stick" recovery that investors might question. With high margins and slower growth, the valuation multiple is considered to be at risk.
The firm's analysis suggests that while ULTA has outperformed in the recent quarter and provided a forecast for the year, the outlook is not strong enough to alter the underweight rating. The report concludes that the raised share price target to $450 acknowledges the recent stock performance but also points to potential challenges ahead for the company.
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