Ulta Beauty seems to have the keys to restart the engine

Often mentioned in our columns, North America's largest distributor of beauty and personal care products has seen its shares rebound significantly over the summer, approaching last year's highs. Investors once again believe in a bright future after the sudden normalization of growth that followed an exceptional decade.

Considered the American equivalent of Sephora, Ulta Beauty dominates its domestic market with its positioning midway between affordable (mass market) beauty and prestige products.

Before this summer, the American company suffered heavily from the prospect of market normalization. But that's not all. Investors were concerned about tariffs, favoring companies with better visibility on their prospects. In addition, the announcement of the end of its partnership with retailer Tesco suggested future difficulties in reaching the general public. Finally, competition is fierce, with Walmart having worked hard on its beauty offering: in the last quarter, Walmart added more than 60 new brands to its catalog.

However, things now seem to be taking a different turn, as evidenced by the stock's tremendous 65% jump since its April lows.

Firstly, the group has very limited exposure to US tariffs as it sources most of its supplies from wholesalers, distributors, or producers based in the US. It is therefore not directly subject to tariffs. Its direct exposure to foreign imports does not exceed 1% of goods. On this variable, the risk is therefore fairly negligible.

Secondly, Ulta Beauty is working on diversifying its business with the recent acquisition of Space NK, the British cosmetics retailer. Last year, Space NK generated nearly £200m in revenue through around 80 stores and a strong online presence. This acquisition will enable the US company to expand its activities in the UK and Ireland. The group has also made inroads into Mexico and will enter the Middle East later this year.

Thirdly, Ulta Beauty is expanding its offering to attract even more customers. The launch of new products is accelerating and the promotional plan is being tightened, excluding perfumes and prestige products, which remain the two main contributors to growth.

Fourthly, beauty products have historically been perceived as essential during economic downturns. This is described as the lipstick effect: in less favorable economic conditions, consumers favor small, affordable luxuries, such as high-end cosmetics, rather than more expensive purchases such as leather goods or ready-to-wear clothing. Households continue to have many concerns, including purchasing power, the employment situation in the US and the deterioration of international relations.

Ulta Beauty therefore appears well equipped, especially as its Q2 figures, published last week, proved reassuring. The group exceeded expectations and raised its annual targets, while remaining cautious for the second half of the year. Against this backdrop, and after the strong rebound in recent weeks, the share price fell 7% the day after the announcement.

Nevertheless, the stock's valuation has returned to more traditional levels of around 20x expected earnings this year, in line with the average for the last five financial years. Ulta Beauty is now better equipped than it was last spring.