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The Temps Are In Charge At Ulta Beauty: Run Fast, Or Buy?

Amy Merrick

Until Valentine’s Day, when Ulta Beauty (ULTA) abruptly announced that its CEO was leaving, the cosmetics retailer was racking up big gains by any measure. Since then, shares have dropped 10.7%. Does the pullback give investors an opportunity to buy into a rare retailer that’s still opening lots of stores?

Former Ulta CEO Chuck Rubin departed last month to run privately-held craft retailer Michaels Stores. Ulta’s chairman, Dennis K. Eck, will run the show temporarily until a successor is named. Rubin held the CEO job for only two-and-a-half years, and he follows on the heels of Ulta’s chief financial officer, Bruce Hartman, who left in October—after less than two months with the company.

That leaves both of the company’s top jobs filled by placeholders, which has to raise questions about the underlying strength of Ulta’s business.

Ulta’s sleek, well-stocked stores-slash-beauty salons have been popping up all over strip malls. Last year the retailer opened about 100 stores, for a total of 550; it’s aiming for 1,000.

That rapid store growth has produced frothy income gains. Ulta’s fourth-quarter sales jumped 30%, and net income per share is projected to have increased 31% to 34%. The chain reports fourth-quarter earnings on March 14.

But as investors have piled in, Ulta’s stock price (see its stock chart) has begun to outrun its income growth:

ULTA Chart

The PE ratio is above 35. Ulta also isn’t getting as much of a return on its investment as it was a few years ago. It’s starting to look like new stores are cannibalizing older ones, putting that 1,000-store goal in doubt:

ULTA Asset Utilization Chart

And Ulta could be vulnerable to Amazon, (AMZN) who’s becoming the suicide bomber of retail in a host of categories, as Ycharts has reported. William Blair analyst Mark Miller notes that Amazon’s prices are, on average, 15.7% lower than Ulta’s for the same products. In a randomly selected basket of Ulta items, Amazon carried 74% of them, up from 69% in a previous survey.

Ulta’s customer-loyalty program, which offers generous rewards to its nine million members, could help the chain battle Amazon. Ulta also benefits from the fact that women like to test makeup colors and sniff perfume samples in person—and Amazon can’t give haircuts or manicures, as Ulta does in its salons.

Investors who believe those factors give Ulta an advantage are paying a hefty premium versus the retailer’s competitors:

ULTA Price / Sales Ratio TTM Chart

Given Ulta’s rapid expansion—which typically strains all levels of a company—and questions about its long-term growth potential, investors would have a lot more confidence if the executives in charge didn’t keep jumping ship.

Amy Merrick, a contributing editor at YCharts, is a former staff reporter for the Wall Street Journal, where she spent 11 years writing about the Midwest economy, state and municipal finances, and the retail and banking industries. Her work has been published in the Poynter Institute’s Best Newspaper Writing series. She can be reached at editor@ycharts.com.

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