Pent-up Demand Fuels Ulta's Big Comeback - For Now
- By Panos Mourdoukoutas
Pent-up demand built up during the pandemic helped Ulta Beauty Inc. (ULTA, Financial) make a big comeback in the first quarter of 2021.
On Thursday, the beauty retailer reported first-quarter net sales of $1.9 Billion, up from $1.2 billion a year ago. Comparable sales increased 65.9%, while net income came in at $230.3 million, or $4.10 per share.
That's a significant change from the fourth quarter of 2020, when the company reported lower sales and earnings as long-time and highly respected CEO Mary Dillon announced she would be stepping down in June.
"We have emerged from 2020 with strong momentum in our sales trends, market share gains, and consumer sentiment," said the company's president, Dave Kimbell. "As increasing consumer confidence, the relaxation of restrictions, and a desire for newness drive increased engagement with the beauty category, our differentiated model, combined with our ongoing efforts to create meaningful guest connections, position us well to lead through the category recovery."
Wall Street cheered Ulta's Q1 results, sending its shares sharply higher in early morning trading.
However, the good news may not keep rolling forever, in my view. Ulta has experienced weak revenue and earnings growth over the last three years, lagging more generalized retailers like Target Corp. (TGT, Financial) by a significant margin, as shown in the table below:
Company | Ulta Beauty | Target |
Three-year Revenue Growth (%) | 4.6 | 11.9 |
Three-year EBITDA Growth (%) | -13 | 13.2 |
Current Operating Margin (%) | 5.3 | 6.99 |
Current Price | $32877 | $227.87 |
GF Value | $281.03 | $143.75 |
One of the problems is that its economic profit, which is the reatio of return on invested capital (ROIC) compared to weighted average cost of capital (WACC), has declined from 23% in 2018 to -7% this year, meaning that the company is destroying value as it grows at this point.
Meanwhile, the economic profit of Target has been rising, reaching 14.0% in 2020.
Company | ROIC | WACC | ROIC-WACC |
Ulta Beauty | 6.91% | 13.91% | -7.0% |
Target | 21.14% | 7.14% | 14.0% |
Long-term Ulta bear Zolidis attributes the company's problems to several factors, like a recession in the makeup category, which caused a decline in the company's sales even before the Covid-19 pandemic.
Zoldis seems to have changed his tune slightly after the company's Q1 report, conceding that the results crushed even his model. "Of course, a lot of transitory factors including stimulus and pent-up demand were reflected in the beat," he says. "We do not see a longer-term case for higher demand in this category, nor do we believe the growth rate will reaccelerate, but pent-up demand may continue for a few quarters, and we suspect guidance is still too low."
Zolidis guesses that shares will hold higher levels, but he would be inclined to taking trading profits at this point. Personally, I am inclined to agree, and I maintain that more generalized reatailers like Target that supply a wide variety of essential goods remain better investments at this time.
Disclosure: I own shares of Target.
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This article first appeared on GuruFocus.
