In the last 30 days, six analysts have raised their 2019 EPS forecasts and nine have increased their 2020 forecasts for this beauty company.
Ulta Beauty (ULTA)
From Hendershot Investments
Ulta Beauty (ULTA) is the largest beauty retailer in the United States offering cosmetics, fragrances, skin care products, hair products and salon services. Through 1,124 stores and its website, Ulta Beauty provides “All Things Beauty, All in One Place” offering more than 20,000 products from over 500 well-established and emerging beauty brands across all price points, including Ulta Beauty’s own private label brand. The company’s rewards program, Ultamate Rewards, counted 28.6 million active members who generated more than 90% of total sales in 2017.
Nearly three decades ago, two drug store chain executives, Dick George and Terry Hanson, quit their jobs to write the business plan for a new retail concept that would change the way women shopped for cosmetics. After raising $11.5 million in venture capital, Dick and Terry launched Ulta Salon, Cosmetics & Fragrance in 1990 with the opening of five stores in the Chicago suburbs providing one-stop shopping for all things beauty.
Service and convenience underpinned the new retail concept where shoppers could find a vast array of both mass market and high-end cosmetics and fragrances plus full-service hair salons. Time-strapped customers appreciated the convenience of Ulta Salon’s strip mall locations which also offered cheaper rents and lower overhead costs than indoor malls for the company.
Today the business, renamed Ulta Beauty, is the largest beauty retailer in America with 1,124 convenient locations in 48 states offering salon services for hair, nails, skin and eyebrows plus more than 20,000 products from over 500 beauty brands. Ulta Beauty also distributes products through its website and mobile app, which includes a collection of tips, tutorials, social content plus a “Glam Lab” that enables customers to virtually try on makeup by uploading a selfie. Customers virtually “try on” thousands of shades of products, a feature especially popular among always camera-ready millennials who are behind a boom in the cosmetic industry.
Despite higher growth in online sales, which approached 38% during the current quarter to $133 million, management recognizes the value of its physical stores and plans to open 100 stores annually with a target of 1,700 stores nationwide.
During the past five years, Ulta Beauty has generated stunning, profitable growth with sales compounding 22% annually and EPS growing at a 30% clip. Ulta Beauty’s same store sales growth exceeded 11% during the past five years, well outpacing its brick and mortar peers.
After-tax profit margins have steadily expanded from 7.6% in fiscal 2014 to 9.4% in fiscal 2018. The company added nearly 400 stores during the past five years while expanding its retail sales per square foot from $407 to $548. With members of Ulta Beauty’s loyalty program, Ultamate Rewards, generating more than 90% of total sales, the program represents the cornerstone of Ulta Beauty’s growth strategy designed to capture an ever increasing share of the fragmented $138 billion U.S. beauty market. Integration of Ulta’s loyalty customer database with the company’s customer relationship management system enables personalized and targeted marketing campaigns. This grooms more loyalty members and increases their spend across beauty
categories while capturing a larger share of their total wallet for beauty expenditures. Marketing focuses on “beauty enthusiasts,” a large and growing segment of beauty buyers from rapidly-growing demographic groups, including millennials, teenagers and Hispanics.
During the second fiscal quarter, net sales increased 15.4% to $1.5 billion on a 6.5% increase in same store sales, driven by 3.1% transaction growth and 3.4% growth in average ticket. E-commerce sales increased 37.9% and now accounts for about 9% of total company sales. Net income increased 30% to $148 million with EPS increasing 34% to $2.46. During the quarter, the company opened 19 new stores ending the quarter with 1,124 stores and square footage of 11.8 million, up 11% year-over-year.
Ulta Beauty maintains an alluring balance sheet with no long-term debt thanks to its strong cash flow generation. Year-to-date, Ulta Beauty generated $246 million in free cash flow. In 2018, Ulta Beauty has repurchased $260.5 million of its stock at an average cost of $230.33 per share with $402 million remaining under the current program. The company ended the quarter with more than $386 million of cash and investments on its blemish-free balance sheet. Investors shopping for attractive long-term returns should consider Ulta Beauty, a HI-quality market leader, with profitable growth, a strong balance sheet and lovely cash flows. Buy.
Ingrid R. Hendershot, Hendershot Investments, www.hendershotinvestments.com, 703-361-6130, September 2018