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2 Beauty Stocks to Buy to Make Your Portfolio More Attractive

As people return to socializing and in-store shopping, with most of the U.S. population now having been at least partly vaccinated for COVID-19, beauty retailers are experiencing a significant increase in-store sales. Also, increased demand for personal care and elevated consumer awareness about organic skincare products are expected to boost the industry’s growth prospects further. So, we think beauty retailer stocks Ulta Beauty (ULTA) and Sally Beauty (SBH) could be great bets now.

A return to normalcy, driven by solid progress on the COVID-19 vaccination front and increasing consumer spending, is increasing cosmetic industry sales. In addition, a surge in demand for skincare products and organic cosmetic products is driving the growth of the global beauty product market. The global cosmetics industry is expected to reach $463.5 billion by 2027, growing at a 5.3% CAGR.

As at least 150 million Americans have now had one shot of a vaccine against COVID-19, the job market is improving, and peoples’ discretionary spending is expected to continue rising in the coming months. In fact, in the 12-months through May, the personal consumption expenditures (PCE) price index rose 3.4%, its  biggest gain since April 1992. With more beauty brands enhancing their digital capabilities and scaling up their operations, they are expected to see significant growth in sales. Also, as brick-and-mortar stores reopen, beauty product retailers’ continued investment in promotions and marketing should help them reclaim substantial customer foot traffic.

Changing consumer buying habits owing to growing consciousness regarding wellness, and rising demand for differentiated beauty products, should help beauty companies Ulta Beauty Inc. (ULTA) and Sally Beauty Holdings Inc. (SBH) maintain strong momentum in their sales. So, we think their stocks could be solid bets now.

Ulta Beauty Inc. (ULTA)

ULTA is a beauty retailer that is based in Bolingbrook, Ill., and offers cosmetics, fragrances, skin and hair care products, and salon services. It sells more than  20,000 items from more than  500 different beauty brands, including its own private label. The company operated 1,264 retail stores across 50 states as of January 30, 2021.

This month, ULTA revealed details about the highly anticipated Ulta Beauty at Target, which will be launched in August in more than 100 Target stores throughout the country, and online with more than 50 specially chosen luxury brands. In the coming years, the company hopes to expand these immersive "shop-in-shops" to 800 Target locations around the country.

During its first fiscal  quarter, ended May 1, 2021, ULTA’s net sales increased 65.2% year-over-year to $1.94 billion. The company reported $305.32 million in operating income , compared to a $101.48 million operating loss in the prior-year quarter. Its net income came in at $230.29 million for this period, compared to a  $78.51 million net loss  in the first quarter of 2020. The company’s EPS came in at $4.10, versus a $1.39 loss per share in the prior-year period.

A $12.2  consensus EPS estimate for the current year represents a 161.8% increase year-over-year. Furthermore,  ULTA has an impressive earnings surprise history; it beat  consensus EPS estimates in each of the trailing four quarters. The $7.84 billion consensus revenue estimate for the current year represents a 27.5% increase from the same period last year. The stock has gained 66.2% over the past year and 19% year-to-date.

ULTA's POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

ULTA is also rated an A grade for Growth and Quality. In addition,  within the B-rated Specialty Retailers industry, it is ranked #9 of 40 stocks.

To see additional POWR Ratings for Momentum, Stability, Sentiment, and Value for ULTA, click here.

Sally Beauty Holdings Inc. (SBH)

SBH is a professional beauty retailer and distributor that operates primarily in North America, South America, and Europe. Sally Beauty Supply and Beauty Systems Group are the two business segments through which the company operates. SBH is based in Denton, Tex.

In April, SBH announced that it had fully redeemed its outstanding $197 million of  5.5% senior unsecured notes due 2023. The repayment was made through surplus cash and SBH’s  efforts to deleverage its balance sheet and reduce its debt levels.

For its second fiscal  quarter, ending March 31, 2021, SBH reported $926.33 million in net sales, representing a 6.4% year-over-year increase. Its operating income grew 74.5% from its  year-ago value to $75.51 million, while its net income surged 186.6 year-over-year to $38.31 million over this period. The company’s EPS increased 183.4% year-over-year to $0.34.

SBH is expected to generate 8.4%  revenue growth for the current year. Its EPS is estimated to increase 88.5% year-over-year to $2.3 in its fiscal year 2021. Over the past year, SBH’s stock has gained 63.3%. Furthermore, it has gained 71.4% so far this year.

SBH's strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our POWR Ratings system. The stock also has an A grade for Quality, and a B for Growth and Value. In the Specialty Retailers industry, it is ranked #5 of 40 stocks.

In total, we rate SBH on eight different levels. Beyond what we've stated above, we have also given SBH grades for Sentiment, Stability, and Momentum. Get all the SBH ratings here.

Click here to checkout our Retail Industry Report for 2021

ULTA shares were trading at $341.25 per share on Monday afternoon, down $0.33 (-0.10%). Year-to-date, ULTA has gained 18.84%, versus a 18.48% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.


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