ULTA - Ulta Beauty

[KCLarkin]

"Ulta Beauty is the largest U.S. beauty retailer and the premier beauty destination for cosmetics, fragrance, skin care products, hair care products and salon services."

 

Over the past 10 years, Ulta has grown at the following rates (per share Valueline figures):

- Sales: 18.5%

- Cash flow: 41%

- EPS: 34%

 

Over the past 5 years, it has slowed a bit:

- Sales: 22.5%

- Cash Flow: 26.5%

- EPS: 27%

 

ROIC has climbed steadily and is now 33%

 

Ulta shares are down almost 30% today after missing Q2 2019 earnings and lowering 2019 guidance. They are now guiding:

- 9-12% sales growth

- 4-6% same store sales (mostly traffic)

- $11.86 to $12.06 EPS

- EPS growth is 9% at the mid-point

 

Shares are currently selling for $239

- 22x 2018 EPS

- 20x 2019e (midpoint)

 

Ulta has no debt (other than operating leases which are now on balance sheet)

Ulta is now using a significant portion of it's net income to repurchase shares (over 100% YTD)

Despite the high growth, FCF seems extremely high (97% in 2018)

 

I just started looking into Ulta this afternoon, but it looks like an incredible business selling at a modest premium to the market. Am I missing anything?

 

Edit: Typo in original. Comps are mostly transactions not ticket.

 

[Gregmal]

Haven't you heard? We're having a recession!

 

Let people give away their stocks and then watch them complain for the next decade about how everything is too expensive...

[Guest roark33]

Value investors are typically not great "retail" investors, once the customers move on, they seldom come back, but you have value investors looking at past financials and thinking, well, if the company does 80% (or whatever number) of what it did in the past 5 years, this will be a great investment.  My two cents.  Not saying this is perfectly applicable to ULTA (I looked at it this morning also), but retail companies are typically something that growth investors do much better at than value investors. 

[KCLarkin]

Value investors are typically not great "retail" investors, once the customers move on, they seldom come back, but you have value investors looking at past financials and thinking, well, if the company does 80% (or whatever number) of what it did in the past 5 years, this will be a great investment.  My two cents.  Not saying this is perfectly applicable to ULTA (I looked at it this morning also), but retail companies are typically something that growth investors do much better at than value investors.

 

I tend to agree with you, but Ulta is still growing same store sales faster than GDP. I tend to avoid retail. But I've seen a couple good ones sell-off temporarily in the last few years. Costco, Lulu, and TSCO come to mind. Though I only bought Lulu. I'm very tempted to buy a starter here. Someone talk me off the ledge...

[peterHK]

Own the brands, L'Oreal, EL, LVMH etc. EM and travel is where the growth is at, not the US.

[KCLarkin]

Own the brands, L'Oreal, EL, LVMH etc. EM and travel is where the growth is at, not the US.

 

Not familiar with the space, but why are existing brands not going to lose market share to emerging brands like Kylie and private label brands?

 

The brands also seem to be trading at a significant premium.

 

[peterHK]

Own the brands, L'Oreal, EL, LVMH etc. EM and travel is where the growth is at, not the US.

 

Not familiar with the space, but why are existing brands not going to lose market share to emerging brands like Kylie and private label brands?

 

The brands also seem to be trading at a significant premium.

 

Because those brands don't exist in China. They want the exclusivity of EL/LVMH etc. EL EM sales grew 30% last year and it's something like 30% of their business.

[KCLarkin]

Because those brands don't exist in China. They want the exclusivity of EL/LVMH etc. EL EM sales grew 30% last year and it's something like 30% of their business.

 

Or probably more accurately, the emerging brands have and will be purchased by EL or LVMH.

[KCLarkin]

I purchased a starter position (2.5%) in ULTA. Ulta continues to gain market share within one of the most attractive retail segments. The strategy of offering both mass market and premium categories will allow it to continue to win against Amazon and Sephora. And specialty will continue to win share from department stores, etc.

 

Current weakness in cosmetics is related to macro product cycles. Specifically, the weakness is caused by very strong product cycles in recent years. Barring a recession, I expect the market to resume modest growth once it works through this cycle. Ulta will continue to gain market share, open new stores, and gain operating leverage.

 

Ulta is also just beginning international expansion, so there is a long runway for potential growth.

 

If this gets below $200, it is a no-brainer.

[Spekulatius]

I don’t know, the CEO didn’t seem that confident in the latest earnings CC. I feel they make have ridden some fads recently (those upstart brands, that failed to deliver) or perhaps they are the fad. I don’t understand the moat with their business (no surprise as a middle aged male).

[KCLarkin]

I don’t know, the CEO didn’t seem that confident in the latest earnings CC. I feel they make have ridden some fads recently (those upstart brands, that failed to deliver) or perhaps they are the fad. I don’t understand the moat with their business (no surprise as a middle aged male).

 

With retailers, I find moats to be a bit mushy. But there are clearly retailers who exhibit moat-like qualities. One surprising thing about Ulta is that it has more active rewards members than Starbucks. If you look at their growth this quarter and the negative growth at the brands, it is pretty clear that Ulta is still taking market share.

 

But anyway, I think this is a good starting point:

 

Ulta Beauty’s success is rooted in a single consumer insight that the founders uncovered. Like all great insights, it is simple but meaningful: Most consumers shop for and buy beauty products across price points, across categories, and across brands. They are looking to curate their own collection. But the beauty industry has always been—and largely remains—set up to separate products by price and category

 

What we find is that this engagement isn’t about demographics. Rather, there is a segment of consumers that sees beauty as a joy: it’s fun, it’s a passion, it’s an escape. By tailoring our experience in a way that helps this behavior come to life, we’ve been able to have success.

 

Source:

https://insight.kellogg.northwestern.edu/article/the-secret-to-ulta-beautys-success-joy/amp

 

[Spekulatius]

I don’t know, the CEO didn’t seem that confident in the latest earnings CC. I feel they make have ridden some fads recently (those upstart brands, that failed to deliver) or perhaps they are the fad. I don’t understand the moat with their business (no surprise as a middle aged male).

 

With retailers, I find moats to be a bit mushy. But there are clearly retailers who exhibit moat-like qualities. One surprising thing about Ulta is that it has more active rewards members than Starbucks. If you look at their growth this quarter and the negative growth at the brands, it is pretty clear that Ulta is still taking market share.

 

But anyway, I think this is a good starting point:

 

Ulta Beauty’s success is rooted in a single consumer insight that the founders uncovered. Like all great insights, it is simple but meaningful: Most consumers shop for and buy beauty products across price points, across categories, and across brands. They are looking to curate their own collection. But the beauty industry has always been—and largely remains—set up to separate products by price and category

 

What we find is that this engagement isn’t about demographics. Rather, there is a segment of consumers that sees beauty as a joy: it’s fun, it’s a passion, it’s an escape. By tailoring our experience in a way that helps this behavior come to life, we’ve been able to have success.

 

Source:

https://insight.kellogg.northwestern.edu/article/the-secret-to-ulta-beautys-success-joy/amp

 

Thanks, great article and really helps with understanding what ULTA is about. It seem sort of e-commerce resilient this way.

 

Another thought is that the increasing self awareness regarding looks related to Instagram and other social media platforms in particular is helping ULTA or similar companies.

[KCLarkin]

Just going through the L’Oreal transcript and they reinforce that this is an industry-wide issue not Ulta-specific:

 

In North America, if I understand your question it’s about the different channels for luxury. What’s happening to us is the same that what’s happening to the market in general. Department stores are pretty tough. And specialty retailers like Sephora and Ulta are growing very well. And so we are – with this retailers we are a very important partner of Ulta, a very important partner too of Sephora.

 

So when the makeup market is strongly growing, really it’s a tailwind. When the makeup market is more difficult, like it is today after these four or five years of boom of the makeup, it’s more a headwind.

 

[KCLarkin]

Another thought is that the increasing self awareness regarding looks related to Instagram and other social media platforms in particular is helping ULTA or similar companies.

 

This is actually the trend that is working against makeup industry right now. There was a very strong 4 or 5 year makeup-heavy cycle driven by social media. But the trend now seems to be towards more natural makeup (e.g. VSCO girls).

[Spekulatius]

Another thought is that the increasing self awareness regarding looks related to Instagram and other social media platforms in particular is helping ULTA or similar companies.

 

This is actually the trend that is working against makeup industry right now. There was a very strong 4 or 5 year makeup-heavy cycle driven by social media. But the trend now seems to be towards more natural makeup (e.g. VSCO girls).

 

I am so out of touch with these trends that I had to google half the terms (VSCO, Tik Tok,  scrunchie). Based on the pics , I think the 70’s make a comeback. Definitely far out of my circle of competence, although I do know a thing or two about the 70’s.

[SHDL]

These are things I tend to worry a lot about when looking at retailers.  What if this movement toward lighter make up turns out to be not merely a cycle but a secular trend? 

[Jurgis]

Well, I don't use makeup, so it's definitely a secular trend.  8)  ::)

[SHDL]

Well, I don't use makeup, so it's definitely a secular trend.  8)  ::)

 

I don’t always scuttlebutt but when I do I do it with n=1.  8)

[Guest roark33]

As if right on cue, ULTA written up on VIC.  Value investors love a good fallen growth story.  There is a lot of air between growth and value and when it comes to retailers, I am not sure that gap is really ever filled. 

[Broeb22]

Well, I don't use makeup, so it's definitely a secular trend.  8)  ::)

 

You're just untapped TAM for ULTA.

[chompsterama]

What's this business got that's special? 

 

Yes, they've ridden a huge wave of makeup/hair/beauty exploding and sometimes being in the right place is all it takes for a while.  But management (as per the most recent CC) is admitting that the tide is turning and the wave shrinking.  I don't know they have anything special beyond that.  Maybe they do. 

 

Here's the thinking:  The business sells mostly third party products and caters to makeup and hair (both styles of which don't change often - most people keep their makeup/hair routine for years once they find what works).  Once a customer finds their favorite dermalogica, clairol, elf, clinique products why should they come back to Ulta?  There are zero switching costs and the business sells almost nothing proprietary.  I mean I like my local tennis shop (that isn't around anymore), but I am not paying $6/sleeve of Penn balls when Walmart or Amazon sell them for $2.50. 

 

In the end, the lowest cost seller will win the business because they are selling someone else's stuff.  I doubt Ulta will be the lowest cost over the long-run.  How can they be? 

 

 

[BG2008]

What's this business got that's special? 

 

Yes, they've ridden a huge wave of makeup/hair/beauty exploding and sometimes being in the right place is all it takes for a while.  But management (as per the most recent CC) is admitting that the tide is turning and the wave shrinking.  I don't know they have anything special beyond that.  Maybe they do. 

 

Here's the thinking:  The business sells mostly third party products and caters to makeup and hair (both styles of which don't change often - most people keep their makeup/hair routine for years once they find what works).  Once a customer finds their favorite dermalogica, clairol, elf, clinique products why should they come back to Ulta?  There are zero switching costs and the business sells almost nothing proprietary.  I mean I like my local tennis shop (that isn't around anymore), but I am not paying $6/sleeve of Penn balls when Walmart or Amazon sell them for $2.50. 

 

In the end, the lowest cost seller will win the business because they are selling someone else's stuff.  I doubt Ulta will be the lowest cost over the long-run.  How can they be?

 

Dude,

 

Have you watch any of the make up tutorials on Youtube?  There are non-binary/gay men/young boys who make a full time living off tutoring women on applying make ups.  The ability of these individuals to make a living is due to the fact that there is a ton of females who are wearing a lot of make up. 

 

10-15 years ago, I may look at an attractive black female and notice the bumps and imperfections in her skin.  In the last 5 years, I have notice a lot more African American females who have great contours and very smooth skins.  They look glamorous and I am sure that the upkeep is expensive.  But who wants to show bumpy skin once they have a taste of that smooth silky skin? 

 

Have you bought cosmetics?  It's an experience!  I'm not talking about a guy who goes to the pharmacy and look at Nivea shave cream vs Harry's.  Kylie Jenner and Rhianna have over 20 different skin tones.  Rhianna has an albino cosmetic.  It's about inclusivity and body positivity.  We all think it's bullshit.  Try to convince me to pay $10,000 for a handbag or $250,000 for a Ferrari.  No way in hell.  But there are buyers out there for it.  It is nice to go to a cosmetic store and try out different shades, tones, and foundations.  It's an experience. 

 

No dog in this fight.  But just like to rant. 

[Peregrine]

To pile on the tennis ball analogy - you know what tennis ball and what brand you like to buy whereas women like to experiment and try out new looks. It totally makes sense why the experiential aspect of cosmetics is so valuable.

[BG2008]

To pile on the tennis ball analogy - you know what tennis ball and what brand you like to buy whereas women like to experiment and try out new looks. It totally makes sense why the experiential aspect of cosmetics is so valuable.

 

To further pile on the tennis ball analogy - you know what tennis ball and what brand you like to buy because "at some point, you played tennis and tried different balls on different courts and you wind up choosing certain types of balls for performance."  Ulta is that playground to chose.  Keep in mind that the world keep making 15 years old girls every year.  Every year, they start using make up and there is an experimentation process.  Back when I was 18, I thought "who wouldn't drink Budlight?"  I thought that way because I have seen hundreds of football games on TV and I have seen thousands of Budlight ads.  At the time, I took it for granted.  But there is a customer acquisition cost to every Bud drinker.  I was slowly brainwashed and I thought I was just getting a free football game on TV. 

[Gregmal]

To pile on the tennis ball analogy - you know what tennis ball and what brand you like to buy whereas women like to experiment and try out new looks. It totally makes sense why the experiential aspect of cosmetics is so valuable.

 

To further pile on the tennis ball analogy - you know what tennis ball and what brand you like to buy because "at some point, you played tennis and tried different balls on different courts and you wind up choosing certain types of balls for performance."  Ulta is that playground to chose.  Keep in mind that the world keep making 15 years old girls every year.  Every year, they start using make up and there is an experimentation process.  Back when I was 18, I thought "who wouldn't drink Budlight?"  I thought that way because I have seen hundreds of football games on TV and I have seen thousands of Budlight ads.  At the time, I took it for granted.  But there is a customer acquisition cost to every Bud drinker.  I was slowly brainwashed and I thought I was just getting a free football game on TV.

 

I'm in my 30's and still think that. Although it took me a while to move on from Natty Light, the original hard seltzer, before hard seltzer was a thing.