Ulta Beauty: A Contrarian Opportunity or a Losing Hand? A Deep Dive into the Beauty Retailer's Decline

The beauty retail sector is undergoing a seismic shift, and Ulta Beauty (NASDAQ: ULTA) finds itself at the epicenter. While the broader market has surged, ULTA’s stock has lagged, raising the critical question: Is this underperformance a harbinger of structural decline—or a fleeting stumble that savvy investors can capitalize on? Let’s dissect the data to find out.

The Underperformance Conundrum

Ulta’s stock has been a laggard in 2025. Year-to-date, it’s down -5.04%, while the S&P 500 (SPY) has gained 1.69%. Over the past year, the gap widens: ULTA’s return of 3.36% pales against the S&P’s 13.66% (see Figure 1). This underperformance isn’t just about short-term volatility. Metrics like the Sharpe Ratio (0.08 vs. SPY’s 0.69) and Calmar Ratio (0.06 vs. 0.80) reveal ULTA’s struggles to deliver risk-adjusted returns.

The Culprits: Competition and Margin Pressure

Ulta’s challenges are multifaceted, but two forces loom largest: competitive encroachment and marginal erosion.

1. The Walmart/Target Beauty Tsunami

Walmart and Target are aggressively muscling into the prestige beauty space. Their ability to undercut prices on everyday essentials has drawn cost-conscious shoppers away from Ulta’s premium offerings. For example, Walmart’s Q1 2025 sales surged 3.8%, fueled by price-sensitive consumers migrating from Ulta’s -3.7% comparable sales decline. Target’s 10.9x P/E and 4.52% dividend yield further highlight their value-driven appeal, squeezing Ulta’s market share.

2. Margin Squeeze and Stakeholder Exodus

Ulta’s operating margin has shrunk to 12.6%, down from 13.1% a year ago. Rising inflation and supply chain costs have pinched profitability, while Berkshire Hathaway’s recent decision to dump its entire stake—a move Warren Buffett once called “a vote of no confidence”—has spooked investors.

The Silver Lining: Valuation and Structural Strengths

Despite these headwinds, Ulta’s fundamentals suggest this dip might be a buying opportunity.

1. Undervalued Relative to Peers

Ulta’s P/E of 15.4x is 61% below its peers’ average of 26.9x, and its EV/EBITDA of 10.76x lags the Retail-Cyclical sector median of 10.09x. Analysts estimate its fair value at $660.98, implying a 38% upside from current prices. Compare this to L’Oréal’s 30.1x P/E and 24.9x EV/EBITDA, which reflect investor optimism about its premium brands.

2. Resilient Core Assets

• Loyalty Engine: Ulta’s membership program boasts 44 million members, accounting for 95% of sales, with spending rising 11% YoY. This sticky customer base is a moat against competitors.
• Strategic Shifts: The new CEO’s focus on new store openings, sustainability initiatives, and private-label growth (e.g., its clean beauty line) could reignite growth.
• Discounted Valuation: Trading at a P/E of 14, below its three-year average, Ulta fits the “bargain” profile for value investors.

The Consumer Trend Crossroads

The beauty market’s shift toward value and sustainability is both a threat and an opportunity. While Walmart’s price wars are a near-term headwind, Ulta’s premium brands like L’Oréal Luxe (which it distributes) and its clean beauty portfolio could thrive in the long term. Sustainability-focused consumers, particularly Gen Z, are prioritizing ethical products—a space where Ulta is already investing heavily.

The Verdict: Buy the Dip, but Proceed with Caution

Ulta’s underperformance isn’t irreversible. Its undervalued multiples, loyal customer base, and strategic pivots position it as a contrarian play, but risks remain:

• Near-Term Earnings: Analysts project a -9.19% EPS drop in 2025, and margin recovery isn’t guaranteed.
• Volatility: ULTA’s 7.37% volatility is higher than the S&P’s 5.51%, making it riskier for conservative investors.

Actionable Conclusion: For investors with a 2–3 year horizon, Ulta’s valuation and structural strengths make it a compelling buy at current levels. However, those seeking stability should wait for clearer signs of margin recovery and market share stabilization.

In the beauty battle, Ulta isn’t dead—it’s just wounded. The question is whether you’re ready to bet on its recovery.