Ulta Beauty Inc. (ULTA, Financial) is a prominent American beauty retailer that had 1,355 stores, totaling 14.2 million square feet, as of the end of its fiscal year of 2022 (which ended on Jan. 28, 2023). In its 10-K for fiscal 2022, it called itself the "largest American beauty retailer, with fiscal 2022 revenue of over $10 billion and net income of more than $1 billion." In now has more than 40 million Ultamate Rewards members.
Ulta’s business strategy is to target what it calls "beauty enthusiasts," who are "consumers who have a deep emotional connection with beauty products." One of the advantages of targeting this segment is that they continue to spend even when the economic environment softens as they prioritize things like beauty, skin care and personal hygeine.
The company also says its customers seek out “the experience of discovering and trying new products and increasingly include beauty as part of their self-care and wellness journey. Reflecting these insights, our objective is to engage and continuously delight beauty enthusiasts with a curated, differentiated, inclusive assortment focused on leading beauty and self-care trends.”
It is also an omnichannel operator, since, as its 10-K for 2022 puts it, “Our guest insights and member data confirm that beauty enthusiasts prefer to transact in physical stores, where they can discover and interact with products and other beauty enthusiasts. At the same time, digital channels offer convenience, product reviews, and price transparency. As a result, the guest journey is increasingly blurring across physical and digital channels.”
More than 95% of its total sales come through its loyalty program, Ultamate Rewards, giving it major consumer research capabilities. And to deal with current cost pressures, it has a continuous improvement initiative.
Based in Bolingbrook, Illinois, it had a market cap of $26.29 billion as of this writing and had full-year 2022 revenues of $10.20 billion.
Competition
The company reports that its major competitors for products include traditional department stores, specialty stores, drug stores and mass merchandisers, as well as the online versions of national retailers and brands. For salon services, the competition comes from chain and independent salons. It does not list competitors by name.
It has underperformed the S&P 500 and the S&P 500 Retailing Index over the past five years:
Still, the company says it has competitive advantages, including its strategy of combining prestige, mass and salon products in one location. It also points to its trained employees, differentiated service offering and the creation of relevant and compelling digital content. We can also add scale, because of its high market cap and revenues. The claim of having competitive advantages is backed up by its industry-leading margins.
Profitability
The company gets an excellent GuruFocus profitability rank of 10 out of 10, based on the following factors:
Return on equity is exceptional at 69.55%, far ahead of the industry median of 6.11%.
Financial strength
Ulta receives a 7 out of 10 rank for financial strength, based on the following criteria:
The interest coverage ratio shows the company generates $4,086 dollars in operating income for every dollar of interest expense. The company is also a value creator for its shareholders, which we can determine because the weighted average cost of capital (WACC) is 11.68% while the return on invested capital (ROIC) is significantly higher at 34.48%.
Growth
GuruFocus gives Ulta full marks of 10 out of 10 for its growth grank. That’s based on factors such as its three- and five-year revenue growth rates, its five-year Ebitda growth rate and the predictability of its five-year revenue growth. Here’s a five-year revenue chart:
Aside from a dip attributable to the pandemic and store closings, revenue has grown consistently. We see the same pattern on an Ebitda chart, although the dip is more pronounced. The same holds for its earnings per share without non-recurring items:
Note, too, that the average annual growth rate has been 15.50% over the past half decade. Further, earnings growth has outpaced revenue growth, marking the company as being effective and efficient.
Free cash flow is keeping up as well. Over the past three years, it has averaged a growth rate of 17.80% per year, and over the past five years, it has averaged a growth rate of 26.40% per year. Last but not least, for the past 10 years, the growth rate jumps to 39.80%.
The business predictability ranking is also high at four out of five stars.
Dividends and share repurchases
Ulta does not pay a dividend, so much of that free cash flow is available for growth. Ulta expects to increase its freestanding store count to 1,500 to 1,700 locations, from 1,355 at the end of 2022. In addition, it reported in the 10-K that it expects to open up to 800 Ulta Beauty at Target (TGT, Financial) shops.
It has actively bought back its shares, though, at an average rate of 3.40% per year over the past five years.
Valuation
Ulta's price-earnings ratio is 21.62 and its five-year Ebitda growth rate is 13.80%. That produces a PEG ratio of 1.57, which is in the fair valuation range (1.00 to 1.99).
The GF Value chart also considers the stock fairly valued:
Gurus
According to the latest 13F filings, eight gurus held stakes in Ulta at the end of 2022. For example, Jim Simons (Trades, Portfolio) of Renaissance Technologies owned 464,800 shares, PRIMECAP Management (Trades, Portfolio) held 69,000 and Jeremy Grantham (Trades, Portfolio) of GMO LLC had 12,447 shares.
Institutional investors held 70.63% of shares outstanding, while insiders owned 5.92%. CEO David Kimbell owned 41,912 shares as of Dec. 13, 2022.
Investors should be aware that 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
Conclusion
Ulta Beauty is a stock with excellent fundamentals. It has a high predictability rank, several competitive advantages, little debt and fair valuation according to the PEG ratio and the GF Value. In addition, it has a great growth track record and plans for future growth. However, in terms of capital gains, the S&P 500 Retailing Index has outperformed Ulta in the past.
