Shares of Ulta Salon, which went public in October, fell $1.36, or 6.5 percent, to close at $19.55 Wednesday after rising as much as 4.5 percent.

A day earlier, the company said fiscal third-quarter profit rose 16 percent, but shares tumbled 24 percent as Ulta said it expects a competitive holiday environment and issued guidance lower than investors were expecting.

Wachovia Capital Markets analyst Lyn Rhoads Walther initiated coverage with an "Outperform" rating.

She praised the company's business model and said it is redefining how consumers shop for cosmetics.

Consumers are increasingly flocking to specialty and discount stores to buy cosmetics, taking market share from department stores.

"Ulta recognized early on that we were in the midst of a paradigm shift in the distribution of beauty products and has created a niche for itself in this market," Rhoads Walther wrote in a note on Wednesday.

She added that selling both mass-focused cosmetics found at drug stores and prestige cosmetics normally found at department stores provides flexibility in a market dominated by swiftly changing consumer preference.

"Ulta has meaningful room for growth in a number of areas, in our view, including its store base, product mix, and profitability," she wrote.

JPMorgan analyst Brian J. Tunick initiated the Romeoville, Ill.-based company with an "Overweight" rating.

"Favorable industry trends combined with a strong competitive position and the opportunity to nearly quadruple its store base make Ulta one of the few retailers that could generate 25 percent to 30 percent annual earnings-per-share growth for several years," Tunick wrote in a note to investors on Wednesday.

He said fourth-quarter sales guidance the company gave on Tuesday was disappointing, but that lowered expectations and the share price give Ulta a "reasonable" premium to peers.