Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA) is the nation’s largest beauty retailer: It carries over 20,000 products, from top-of-the-line to bargain-bin quality. As of January 31, 2016, ULTA has 874 stores across 48 states as well as a growing online website.
That’s one new state and 100 news stores just in the past year. It also has full-service salons in its stores. Basically, it has cornered the market on everything from buying make-up and lipstick to having a complete makeover, without ever having to leave the store.
ULTA is second only to Estee Lauder Companies Inc (EL) (by market cap), which is almost 3x the size. Aside from EL, ULTA is more than 3x as large as its closest competitor, Sally Beauty Holdings, Inc. (SBH).
And while the beauty space is doing well for many of the top retailers, ULTA has the top spot. And it’s continuing to run at that spot. ULTA stock has soared 34% in the past year; meanwhile, SBH has lost 4% and EL has gained half as much as ULTA during that timeframe.
Why ULTA Stock Is Built to Last
The magic of the beauty space is that it thrives in these slow-growth environments. As consumers cut back on big-ticket items, they allow themselves some small indulgences. And when they part with their hard-earned money, they want selection, with style — that’s what ULTA provides.
It also features its own in-house brands, which helps attract brand-conscious consumers that want to project a bit of hip with their practicality.
Its formula has been working for a while now. Since going public in November 2007, the stock is up 552%. That works out to an average annual gain of more than 60%. And it did this through the Great Recession. That’s pretty stunning for any retailer and far better than any stock index.
Granted its price-to-earnings ratio is an industry-high 41, but given its growth, that isn’t actually as high as it might seem. This stock has enduring momentum.
The risk is always over expansion. You build more stores that you can operate and it starts to hurt your overall margins. And once that growth story is gone, Wall Street tends to look for the next shiny object.
But ULTA has been making inroads with its online store. It has tips, a social media component and a solid build out. Since you don’t have to build and manage new stores with a website, this becomes a very high margin solution to the expansion challenge.
Still, that hasn’t stopped some folks from looking for signs of ULTA stock’s doom.
At the end of March, short selling increased 27% in a week, up to 3.8% of available shares. But at the same time, insiders were buying and hedge funds were boosting their positions significantly.
That is the perfect environment for a short squeeze. That’s when investors who are short the stock start to see it rally and then dump their positions as the stock runs higher. Usually that momentum will then carry the stock higher after the short sellers have left.
So that brings us to the final question: Why deal with tech stocks when you can buy a great retailer like ULTA?
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
