Ulta Eyes "Beauty Enthusiasts"

09/28/2018 5:00 am EST


Ingrid Hendershot

Founder and President, Hendershot Investments, Inc.

Ulta Beauty (ULTA) is the largest beauty retailer in the United States offering cosmetics, fragrances, skin care products, hair products and salon services, notes Ingrid Hendershot, a value investor, money manager and editor of Hendershot Investment.

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 counted 28.6 million active members who generated more than 90% of total sales in 2017.

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 — 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.

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 high-quality market leader, with profitable growth, a strong balance sheet and lovely cash flows. Buy.

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