12:20 PM EST, 12/06/2024 (MT Newswires) -- Ulta Beauty's ( ULTA ) latest quarterly performance is a "leading indicator" of its ability to generate sustained positive sales growth despite a tough business environment, UBS Securities said in a note e-mailed Friday.

Late Thursday, the beauty retailer reported that its fiscal third-quarter earnings rose to $5.14 a share from $5.07 a year earlier, while net sales increased 1.7% to $2.53 billion, both topping Wall Street's estimates. Comparable sales grew 0.6% versus the Street's views for a 1.9% decline. "I am encouraged by the improving trends we are seeing in the business and optimistic about our holiday plans," Chief Executive Dave Kimbell said on an earnings conference call, according to a FactSet transcript.

The company's shares were up 10% in Friday trade. So far this year, the stock has declined 11%.

"The market is currently weighing Ulta's ability to return to sustained positive sales growth even if the backdrop remains challenging," UBS analysts, including Michael Lasser, said in a note to clients. The retailer's latest performance is "a positive leading indicator" in this regard.

Ulta's traffic was positive during the quarter, while it increased its loyalty program members by 5%, equally weighted by reactivated and new customers. The results don't indicate that online retailers are having a "disruptive impact" on the company, UBS said.

The company's improved third-quarter sales performance didn't come at the expense of "significant incremental pressure" on its gross margins, the analysts said. "So, even if (2025) is still an investment year, there could be upside to its initial margin target of slightly below (approximately) 12%."

Ulta now expects full-year EPS of $23.20 to $23.75, while comparable sales are seen flat to down 1%. The company's prior outlook called for EPS between $22.60 and $23.50, with comparable sales previously projected to be flat to down 2%.

For the ongoing quarter, Ulta projects comparable sales to fall in the low-single-digit range. The performance is expected to be affected by "a compressed holiday season, a dynamic operating environment and continued uncertainty" regarding underlying consumer demand, Chief Financial Officer Paula Oyibo said on the call.

UBS said the quarterly outlook "may embed some conservatism." The brokerage increased its price target on Ulta's stock to $490 from $470, with a buy rating.

"Longer-term, we think Ulta can still provide line of sight to EPS of $26 to $28 a couple of years out," the analysts wrote. "As it sustains an upward earnings revision cycle, its multiple should retrace to its historical levels. Net-net, we think the stock has more room to run."

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