Ulta Beauty’s Turnaround Plan Is Working. Why One Analyst Still Downgraded the Stock.

Ulta Beauty stock has gained 18% this year. (Dreamstime)

Ulta Beauty’s turnaround plan under new CEO Kecia Steelman is working well. Almost too well—share price and valuation have jumped over the past few months, prompting a new downgrade on concerns that the stock has gotten too expensive.

Loop Capital analyst Anthony Chukumba downgraded Ulta to a Hold from a Buy on Friday, arguing that while the company’s fundamentals remain strong, the stock’s valuation has climbed too much to warrant a Buy rating. As of Friday morning, Ulta stock was trading at $514.17, above Chukumba’s price target of $510.

Ulta changes hands at 20.9 times the next 12 months’ earnings, according to FactSet. The shares have gained 18% this year and roughly 40% over the past 12 months. The S&P 500 has gained 8% and 17%, respectively, in the same time frames.

“Simply put, we believe our bullish outlook on Ulta Beauty is largely priced in at current levels,” Chukumba wrote. “Thus, we await a more attractive entry point to become more constructive on the stock again.”

Steelman—formerly Ulta’s chief operating officer—took the helm at Ulta in January, after CEO Dave Kimbell stepped down. She promptly unveiled a new strategy for the beauty retailer, called “Ulta Beauty Unleashed,” that prioritizes launching new brands, improving the in-store experience, ensuring items are in stock, and streamlining corporate teams.

In the first two full quarters under Steelman, Ulta has blown past earnings estimates, and managed to post solid revenue growth despite a broader slowdown in the beauty industry.

Chukumba is bullish on Steelman’s plan and the company’s ability to execute. But with shares inching closer to the stock’s 2022 record high, the “upside potential and downside risk are fairly balanced at current levels,” he wrote.

That said, investors may not have to wait long for a better entry point, Chukumba says. Share price has been volatile over the past couple of months, and there are still broader risks ahead for Ulta, including ongoing macroeconomic uncertainty and rising competition in the beauty space.

Ulta stock dipped 0.1% Friday, while the S&P was gaining 0.3%.

Write to Sabrina Escobar at sabrina.escobar@barrons.com