Investing.com -- Bank of America upgraded Ulta Beauty to Buy from Neutral in a note on Tuesday, arguing that a recent share price pullback has created an attractive entry point into what the bank describes as a high-quality compounder trading at a discount to peers.

Analyst Lorraine Hutchinson has a price target of $685 on the stock, saying the company's investment cycle is building long-term competitive advantages rather than merely defending market share.

"Our recent work gives us more confidence that ULTA is using this investment to build a flywheel to drive growth instead of just running on a treadmill to keep up," she wrote.

BofA had previously worried that elevated spending in fiscal year 2025 was structural rather than cyclical, a concern that has weighed on the stock, which sits 26% below its 52-week high. Hutchinson said that the pullback has reset expectations to more reasonable levels.

The bank expects improving cost discipline to drive operating income growth and stronger free cash flow, with management targeting a low-double-digit operating income algorithm in fiscal year 2026 and beyond.

BofA sees "a path to multiple expansion as cleaner SG&A discipline emerges."

A capital return story also adds to the investment case, BofA said, after management raised its buyback outlook to $1.5 billion from $1 billion, representing approximately 6% of market capitalization.

The bank raised its fiscal year 2026 and 2027 earnings-per-share estimates by 1% and 3%, respectively.