Ulta Beauty (ULTA) stock price is stuck in a deep bear market as concerns about its business grows. It has crashed by over 36% from its highest point this year and is hovering near its lowest point since May 2022.
Notably, the stock has dropped in the last six consecutive months, even after Warren Buffett invested in the stock.
Ulta is often promoted as a classic value stock because of its strong market share in the beauty industry and its low valuation multiples. Still, a closer examination shows that the company has an uphill battle ahead. Here are three reasons to sell Ulta stock.
Technicals are not supportive
We believe that technical analysis should play an important role when making investment decisions because price action is often driven by the psychology of investors.
Ulta has some ugly technicals that point to more downside in the next few months. For example, on the monthly chart below, we see that the stock’s recent crash happened after it formed a double-top chart pattern at $554.96.
A double-top pattern happens when an asset forms twin peaks, implying that investors failed to push it higher. Now, Ulta Beauty stock has moved slightly below the neckline of this pattern at $370, pointing to more downside.
Therefore, if the double-top pattern works as expected, it means that the shares will crash to $160, down by over 55% from the current level.
Ulta Beauty stock has more worrying technical formations. On the weekly chart, we see that it has formed a double-top pattern and is about to form a death cross, which happens when the 200-week and 50-week Exponential Moving Averages (EMA) cross each other.
Ulta needs to drop by less than 5% for this cross to happen. If it does, there are signs that the stock will drop by over 50%.
The opposite of a death cross is a golden cross. In Ulta’s case, the last golden cross happened in December 2020 as the two moving averages crossed each other. After that, the stock jumped by over 114% to a record high of $576.
Additionally, Ulta is hovering near the 50% Fibonacci Retracement point, meaning that it could have a bearish breakout soon. More downside will be confirmed if it drops below the year-to-date low of$324.
Lessons from CVS Health and Walgreens Boots Alliance
The other reason why Ulta stock price has more downside is that it has some close similarities to CVS Health and Walgreens Boots Alliance, two companies that have imploded.
CVS and Walgreens stocks have crashed by 11% and 61%, respectively in the last twelve months. This drop, as I have written before, is mostly because shopping patterns among most Americans have changed.
Instead of shopping in specialty retailers, many people are now shopping in general retail and e-commerce platforms. Companies like Walmart and Amazon, which have subscription products like Amazon Prime and Walmart+ have benefited substantially from this trend. Specialty retailers like Ulta Beauty will struggle to compete with these firms.
The company is also competing with other newer beauty brands, especially those from celebrities like Kylie Jenner and Rihanna.
Additionally, like CVS and Walgreens, Ulta is seeing a substantial increase in costs, especially wages, which are taking most of their revenues. It expects to spend between $400 million and $450 million in capital expenditures this year. Most of these funds are going towards store remodeling as it seeks to make them more welcoming.
Ulta Beauty is no longer growing
The other reason why the Ulta Beauty stock is about to retreat is that the company is no longer growing as it did in the past. A good example of this is what happened in the second quarter.
Its financial results showed that revenue came in at $2.55 billion, up slightly from the $2.52 billion it made in the previous quarter. In the first half of the year, its revenue of $5.2 billion was a few points higher than the $5.16 billion it made a year earlier.
This slow revenue growth happened even though the company now has more stores than it did before. It ended the last quarter with 1,411 stores, up by 17 from the first quarter. Same store sales dropped by 1.2%, signaling that the company’s challenges run deep.
The management believes that the slow growth trajectory will continue. It now expects that its net sales this year will be between $11 billion and $11.2 billion while comparable sales will drop by 2%.
This slow growth explains why the company has now become cheap. It trades at a GAAP P/E ratio of 14.4 and a forward multiple of 15.4, much lower than the industry average and the S&P 500 average. The industry has a median P/E ratio of 18 while the S&P 500 has a multiple of 21.
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