Piper Sandler Warns of Earnings Surprise for Ulta Beauty

Ulta Beauty

Nasdaq 100 component Ulta Beauty is set to report their earnings on Thursday, and Piper Sandler tells us that the results will be grim. They still like the stock though.

There are quite a number of hot stocks this year in the Nasdaq 100, but Ulta Beauty is certainly not one of them. It was no secret that this is one of the stocks that has low immunity toward pandemics, unlike a lot of Ulta’s brothers and sisters on the index, in sectors that have shown a very strong immunity and have put in fabulous years so far, pandemic or no pandemic.

In some cases, stocks have benefited even more from the effects of COVID-19 on the economy, companies that provide technology that is even more in demand during these times, or retail stocks that do not depend on physical stores.

Investors who insist on a broad exposure to the market, such as those who invest in index funds or hold an actively managed but diversified portfolio have paid the price, but if you’re worried about circumstances like this, it is only sensible that we assess the opportunities with certain stocks according to what is actually going on in the world, as unpopular of an idea as that may be among investors.

While investors are naturally focused on the longer term, where a stock like Ulta Beauty may still look good on this timeframe, we can still benefit from a shorter-term outlook, and the current state of this stock is a perfect example of how we may want to step aside when a stock is struggling even though we may still really like it further down the road.

Ulta Beauty had a great start to 2019, gaining 50% in the first half of the year, but times since have been far less exiting. Between July 2019 and March 2020, at the bottom of the coronavirus crash, Ulta had given up a total of 65%.

There wasn’t any question that they deserved to take a hit from the recession as people focus a lot less on beauty when they are locked up at home, but it was also high on the list of stocks that got punished a little too much by this crash, even though that could be said about just about every stock during this time. Ulta Beauty did rebound by a very nice amount, and doubling in just 6 weeks isn’t too shabby for sure, and has since settled in to around the middle area between their February peak and their March low.

If you are trying to keep score by looking at Ulta’s earnings, you are going to be all over the place. This is a poor enough way to understand stocks, but is particularly wishy-washy with this one. The real thing that we need to pay attention to though is the extra risk that poor earnings involve, and while we never want to be in a position based upon earnings, we sure want to be afraid when they aren’t so good, due to the way this dampens the mood of the market.

Ulta nosedived during a time where their earnings were doing great, where they dropped a quarter of their value between July and September. They also doubled in value during a time where their earnings were expected to come in at 44 cents per share but instead reported a loss of $1.12 per share.

This time around, analysts are all over the place, ranging from earning about a dollar a share to losing about a dollar a share, with the consensus, the average, being a gain of 19 cents. Piper Sandler’s Erinn Murphy sits at the low end of this scale, predicting a loss of $1.03 per share.

Time will tell who is right, but Murphy seems to have her eyes open a little wider than the pack, and her concerns make sense and are significant enough to be very cautious about. Ulta Beauty may have rallied during the last terrible earnings call, but this generally does not happen very often, with the COVID-19 crash changing the rules significantly but temporarily.

We Want Our Money on Stocks Not Getting Ready to Be Punched

Riding the bounce earlier in the year made sense, especially given the additional opportunity arising from the high volatility of this particular stock, but hanging around a stock in this sector after the party has ended and after they gave back a good chunk of this rebound, and being in an industry that isn’t exactly lighting it up revenue or earnings wise, with the very real prospect of more pain, shouldn’t be anyone’s cup of tea. It’s Murphy’s though, oddly enough.

She is predicting revenues to drop all the way to -32% year over year, where we were only expecting -19%, and the firm is cautioning investors to lower their expectations as a result of this. Our expectations were way too low already, at this point in time anyway, and when your head is already underwater, you can’t breathe anyway so what you need is to get it above the water, not sink deeper into it with more effort required to recover.

Murphy is still bullish on the stock though and has reiterated her outperform rating, although this depends on what you are looking to outperform to arrive at this conclusion. She did lower her target from $275 to $268, but that’s still a nice move up from its current $222. That’s over 20% in whatever time period she is predicting this over, and they never tell you that as this makes it a lot easier to defend their predictions. No one seems to care either, which is pretty strange considering that 20% by the end of the year and 20% many years down the road are two very different things, one that looks very nice and another quite poor.

6 months to a year is the unspoken time frame, which is still pretty broad and enough to make a real difference as far as the desirability of a prediction goes. It’s not that these predictions ed up all that accurate anyway and the most we can really gather from them is the extent of an analyst’s feelings about a stock generally. Murphy still likes Ulta Beauty.

We always want to give you more to sink your teeth into than stale sandwiches that have been passed around a lot and things you can read about in many other places, and this story gives us a nice opportunity to speak about the benefits of investors taking refreshing breaks from stocks they may otherwise like in the longer run, like the way Murphy likes Ulta.

People who are just planning on holding stocks anyway aren’t ever going to be persuaded by the relatively short-term outlooks of these analysts, investors who mark time in years and even decades, not months. This is presumably targeted toward position traders who hold stocks for 6 months to a year generally, or investors who are either close to getting out or may be looking to get in, in the same way as you shop around before you buy something.

If Murphy thinks that Ulta may be in for a rough ride for a little while anyway, and then will perform well, perhaps in 2021, does it make sense for her to want us to be in it right now? If it will be sunny tomorrow but raining today, does it make sense to hold a picnic while getting soaked? Should we not wait until tomorrow when the weather is better to hold our picnic?

It Always Makes Sense to Sidestep Real Trouble

It should not matter if we are looking to position trade this stock or hold it until the day we die and will it to our grandchildren, because the rain falls on us all, whether we are shy of it, or don’t care and lack the motivation to run for cover, and figure that they’ll dry out later anyway.

We were just given a great example of this during the coronavirus crash, and even though it is more difficult to bear standing in rain this torrential, with the wind blowing as hard as it did then, there are many who just refuse to avoid weather no matter how bad.

The heading for cover with Ulta Beauty now is more subtle, and just about everything is in comparison to moments of panic like we recently saw, but we still should want to avoid significant rainfall, or at least want to be in a drier and sunnier place.

Murphy might just be looking at and speaking of Ulta Beauty’s stock, but we should never look at stocks in isolation. It’s a shame that the recommendations of analysts weren’t so provocative sounding, such as buy, sell, hold, underweight, and overweight, and everything but a sell keeps us in these things by way of direction.

If something is underweight, we wonder why anything underweight should ever be in our portfolios anymore, or even stocks of average weight. We would hope that we would be looking to do better than average, beating the market in other words, and anyone who doesn’t just invest in the market surely wants to beat it, unless their goal is to make less money.

Murphy sees Ulta as overweight, although this leaves open two important questions, overweight compared to what and overweight over what time period. We can assume that she means compared to the market and during the usual 6 month to 1 year timeframe, but it would only make sense to want to be in it when it is gaining weight, not about to lose some.

The coronavirus bounce festival is over, and Ulta Beauty got more than their share of the fun, but we’re at a time where people aren’t driving the price of any old stock up, and only the deserving are proceeding much from here.

We agree that Ulta Beauty may be worth a look in 2021, once the earnings numbers get back up to at least decent, which will take a little while. At the very least, if we are looking to hold this, side stepping this earnings report that does look like it will well disappoint makes a lot of sense.

Who knows, maybe this stock will see a really bad earnings number and take off anyway, as Ulta’s stock price hasn’t exactly tracked their earnings lately. It’s all about being on the right side of the probabilities though, and anyone who thinks that they are more likely to be right when they are on the long side going into a probably bad earnings call does not understand them very well.

Ulta Beauty may end up being a little overweight, but sure does not look like it is now, and now is what matters now.

Monica

Editor, MarketReview.com

Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.

Contact Monica: [email protected]

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