Ulta Beauty (ULTA) is the most prominent beauty retailer in the United States, and the prime beauty destination for cosmetics, fragrance, skincare, and other related products.
The company aims to provide unparalleled product broadness, value, and convenience in a unique specialty retail setting. (See Analysts’ Top Stocks on TipRanks)
Ulta Beauty’s complete product line comprises more than 600 brands, diversifying across multiple consumer purchasing power levels, thus attracting virtually all industry target groups.
While the cosmetics industry is brutally competitive, Ulta Beauty’s brand makes for a decent moat. The company’s growing loyalty program and online sales should also help grow the business and expand Ulta Beuty’s overall margins going forward.
At its current price levels, the stock has likely further upside ahead, despite its rebound from last year’s lows. I am bullish on the stock.
A Robust Performance
Ulta Beuty’s largest source of revenues is Cosmetics, which account for around 44% of the top line. Next are Skincare, Bath, and Fragrance Products at 28%, while Hairstyles and Styling Products make up for around 20% of Ulta’s total sales.
By dominating all sub-fields of the beauty industry, the company has been able to develop a fantastic loyalty program, not only boosting volumes sold, but adding a recurring element to sales as members aim to extract the most value out of the loyalty program.
Members grew from 23 million to 34 million from 2016 to 2019, and while this number dropped to 31 million in 2020 as a result of the pandemic, the upward trend should continue as we return to normality.
The quick recovery of the beauty industry, and consequently, of Ulta’s results are evident in the company’s most recent quarterly results. In Q2, net sales increased 60.2% to $2 billion versus $1.2 billion in the comparable period last year.
Capital Returns, Valuation
Ulta Beauty’s historical capital returns have been in the form of stock repurchases. Apart from a special dividend back in 2012, the company has never paid a dividend.
In 2020, stock buybacks amounted to $115 million versus $681 million in the previous year, due to the company preserving cash during the pandemic. However, stock buybacks are strongly resuming as Ulta Beauty repurchased $243.5 million worth of stock in Q2 alone.
As far as the valuation goes, Ulta Beuty is trading at around 24.4x its next 12-month (NTM) net income, which is in line with its historical average.
The company’s gross margins are continuously growing, powered by the loyalty program and online sales growth. Specifically, they expanded from around 35% in 2015 to 42% currently.
Assuming the positive expansion continues, the current valuation multiple looks rather attractive. The company is expected to grow EPS in the double digits in the medium term, which stock buybacks should aid.
Wall Street’s Take
Turning to Wall Street, Ulta Beauty has a Moderate Buy consensus rating, based on 14 Buys, eight Holds, and zero Sells assigned in the past three months.
At $445.19, the average Ulta Beauty price target implies 16.9% upside potential.
Disclosure: On the date of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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