Ulta Beauty: What Should Investors Do After The Recent Run-Up? (NASDAQ:ULTA)


Portrait of young afro woman with bright make-up


Ulta Beauty, Inc (NASDAQ:ULTA) is an American retail chain of beauty and cosmetic stores that is based out of Bolingbrook, Illinois. The company was founded in 1990 and has since grown to be the largest American beauty retailer, with over 1,300 stores across the country. Between 2017 and 2021, Ulta continued to expand its operations with 334 net new store openings, as well as over 100 Ulta Beauty at Target (NYSE: TGT) in-store shops. Ulta offers its customers over 25,000 products from over 600 brands, including its own Ulta Beauty private brand label.

Ultra beauty product catalog

Ulta Beauty Investor Presentation

Despite widespread market volatility over the past ten months, Ulta Beauty has been on a tear lately. The stock remains strong despite widespread inflation, supply chain issues, and a global economic slowdown heavily impacting many firms in this space. The company and the stock have both been resilient, but one has to ask whether Ulta Beauty is a buy at current levels.

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Earnings Download

in the recent Q2 2022 earnings report, the company continued its recent spate of strong performances with net sales of $2.3 billion compared to $2 billion in the year prior. Comparable sales increased by a solid 14.4%, and net income stood at $295.7 million, which was good for $5.70 per diluted share. This was driven by strong consumer demand across all business segments. Management was bullish about their ability to continue to deliver strong results despite a potentially challenging environment. The leadership team highlighted strong brand partnerships, product innovation, and the easing of COVID-19 restrictions as strong drivers of success. The strong performance saw Ulta beef up its balance sheet, with cash and cash equivalents now at that impressive $434.2 million. The company is also in the middle of executing its share buyback program, with $1.6 billion remaining of the original $2 billion authorization from March. This provides a nice asymmetric risk-reward opportunity for investors, as they know that continued repurchases will likely become support in any major downturns.

The state of retail has changed considerably following the COVID-19 pandemic. There has been a global shift to eCommerce, and Ulta has certainly been a company that has embraced the new digital experience. Between 2017 and 2021, Ulta reported that eCommerce sales grew by a CAGR of 35%. This surge in online shopping was anchored by one of the strongest retail loyalty programs in America, with over 37 million members.

Ulta beauty's strong membership program

Ulta Beauty Investor Presentation

Company Outlook

You can argue that it is already a leader in the beauty and cosmetic industry. There are, however, some colossal companies in the space, like its rival, Sephora, and department stores like Nordstrom (JWN), but Ulta is a unique case in terms of the sheer size of its stores. With its added partnership with Target, Ulta is also showing its flexibility as an add-on store to a bigger retailer. With nearly 2,000 Target stores in the United States, Ulta has added optionality to piggyback off of the larger company.

Ulta is also doing an excellent job targeting Gen-Z females as its core audience. This has undoubtedly tied into the company’s rapid growth in the digital commerce space. Ulta also offers a wide range of price tiers to attract customers from mass-market brands to what it refers to as prestige brands. This wide selection of products helps attract a broader customer base, something that both Sephora and Nordstrom have been unable to do.

Its reward system is top of the class in the American retail industry. Ulta reports that 95% of total Ulta Beauty sales are made by Ultamate Rewards Members. That is a staggering level of loyalty and customer retention, which has allowed the company to forecast a 5-7% CAGR in net sales through 2024. As beauty and cosmetics products continue to be a popular subject on social media sites like Instagram and TikTok, Ulta is projected to remain an industry leader in the foreseeable future.

Valuation And Forward-Looking Commentary

Despite the strong performance of the stock, it is easy to argue that Ulta Beauty is still quite cheap. At current levels, investors are paying just $2.24 for each dollar of the company’s revenue, which is marginally lower than its five-year average of $2.44 per dollar of revenue. Investors also would be buying into our enterprise value to an EBIT level of 13.27, just off its low of 7.5 and miles away from the high at 52.7 in early 2021. This suggests that the runway is long for the stock, and the lack of any real dip to buy would suggest that the market is also aware of this fact.

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The company is also cheap when you consider its P/E ratio. We can see that it’s at the low end of historical ranges. It is important to highlight that the Covid-19 pandemic because some unusual earnings performances in late 2022 and early 2021, which has skewed the historical ranges. We can also see that EPS trends have been favorable since that disruption and are now at highs.

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As trends would suggest, Ulta has done a great job delivering to EPS expectations. The company has beaten strongly in each of the last four reports. However, we can expect a slight slowdown due to seasonality in Q3 before ramping things up in the winter and in H1 2023.

Ulta beauties EPS trends

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As we discussed earlier also has a solid track record of share buybacks. This was once one of the strongest stocks in the history of the stock market, and repurchases are a major driving factor for large firms like Ulta.

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The general expectation is that the company will continue the strong repurchases and probably continue to improve EPS figures. Leadership is very bullish about H2 2022, and it’s hard to find reasons to disagree with them outside of a financial crisis. We can expect Q3 earnings to come out in early December, and I would expect another strong beat. In the recent report, EPS cooled slightly and is expected to cool again, but investors should focus on the commentary provided by the leadership team and any e-commerce growth. New brand deals would also be welcome, but we would like to get updates before the report, if applicable.

The Takeaway

It’s great to see Ulta return to being the growth powerhouse it was in the past. The leadership team is very bullish about prospects for EPS growth going forward. The company has transformed into a more robust, well-rounded version of itself, and I don’t believe this is fully reflected in its valuation just yet. The strong brand deals and opportunities abroad provide an easy-to-see path for continued growth in the long term. The stock is looking beautiful even after this run-up. I rate Ulta Beauty as a long-term buy.

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