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Ulta Beauty: A Diamond In The Retail Rough

Daniel Laboe

Ulta Beauty ULTA is another retail gem that has somehow defied the broader retail trend. Over the past decade, Ulta has grown its top-line by more than 6 fold, and its bottom-line has grown over 2400% in the same time frame. Over the past 10 years, the stock has surged 3845% beating every benchmark by an astronomical amount.

 

Ulta Beauty is the largest beauty retailer in the United States, offering customers more than 25,000 products across roughly 500 brands. They are one of the only pure-play beauty businesses in the retail space with no close publicly traded competitors.

As other retailers are closing their doors, Ulta has been able to expand its footprint. They have opened 99 stores or more annually for 7 consecutive years, increasing the number of stores by 2.6x since 2011. The retail space has been closing stores at an exponential rate with more than 7000 announced to close in 2019. This is good news for Ulta who will be filling some of this brick-and-mortar retail void, expecting to open 70-80 new stores annual for the next “several years”.

E-Commerce Focus

Ulta has been able to pivot with the shifting retail industry, investing in its digital technology so that modern omnichannel consumer demands can be met. Omnichannel customers spend almost 3 times more than retail only customers, according to Ulta’s latest annual report. Their e-commerce business has been the fastest growing channel, currently making up only 11% of revenue but expected to make up a larger portion of the business as Ulta continues to invest in its “digital innovation ecosystem”.

At the end of last year, Ulta acquired two tech start-ups that focus on AI and augmented reality. This might sound like a strange move for a beauty retailer but these acquisitions are expected to improve their digital platform. AI is projected to strengthen the firm’s understanding of consumer patterns and personalize buyers’ preferences. Augmented reality is becoming more widely used in digital retail, helping consumers try on products without leaving their homes. These should enhance Ulta’s omnichannel platforms and further advance their e-com presence.

Outlook

Ulta Beauty is expected to see double-digit top and bottom line growth for the next two years as this business continues to expand rapidly. Sell-side analysts have been increasing full-year EPS estimates for ULTA and I believe that this will continue as the firm continues to over deliver. ULTA is currently sitting at a Zacks Rank #2 (Buy).

Be cautious with this stock considering its beta is very close to 1, meaning it is expected to follow the broader markets performance closely. Ulta Beauty is in the consumer discretionary space implying that the company does better when consumers have a larger disposable income, which will trace the US’s economic performance.

ULTA is currently trading at a forward PEG of 1.35x, which is below its 5-year median and below the nonfood retail industries PEG of 1.84x. I use price-to-earnings-to-growth (PEG) for this firm’s valuation because of how quickly it is expected to continue growing. It appears that ULTA is trading at a discount and could make a savvy buy if you believe the equity markets will continue the decade long bull rally.

 

Comps

As I mentioned earlier, there are no publicly traded pure-play beauty competitors for me to use as a direct comparable. L Brands LB, which owns Victoria Secret and Bath & Body Works, has a similar customer base to ULTA but have not been able to achieve the same results. LB has lost investors more than 44% over the last 5 years with losses exceeding 26% in just the last 52-weeks. They announced they will be closing 53 Victoria Secret stores this year, following the 30 that were closed in 2018. This is a quintessential retailer that hasn’t been able to adapt to the changing consumer.

Lululemon LULU also has a comparable consumer base to Ulta but has been following a very different narrative than L Brands. LULU is a prime example of retail gem and has shown investors over 64% returns in the past 52-weeks. Analysts have continued to raise EPS estimates for the next couple years pushing this stock into a Zacks Rank #2 (Buy).

Earnings Preview

Ulta is releasing its Q1 financial results after market close on Thursday and investors are expecting double-digit growth figures. EPS estimates sit at $3.06 per share, representing a 23% increase from Q1 last year. ULTA has beaten EPS estimates over 92% of the time since 2012, with an average upside surprise of about 3%. Revenue is expected to be $1.7 billion for Q1, which would illustrate over 14% growth from the same quarter last year.

Take Away

ULTA, closing today at $334.85, has shown investors 36.8% returns since the first of the year and is just 7% off its all-time high of $359.69 that it hit at the end of April. I believe that this firm could bust through the $360 level to new highs if they can continue their prolific expansion and the equity market & economy don’t fall apart. ULTA would make a good retail-sector addition to your portfolio.

 

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