If you had to choose one stock to buy for 2017, your first thoughts probably wouldn’t go to the retail names.
2016 was, in general, a terrible year for America’s retailers. While employment continued to improve and wages finally started to rise, the consumer was in a funk. While they might have bought those tools from Home Depot Inc (NYSE:HD), they completely shunned clothes of any kind and turned their backs on the big department stores.
In the weeks leading up to the presidential election, most retailers reported an even further slowdown in spending. It’s almost as if the consumer was paralyzed.
But the post-election world is a very different place. Retailers who reported earnings after the November election almost unequivocally said they saw a big jump in business in the weeks afterwards.
Consumers were spending again.
Will these new animal spirits last until 2017? No one knows. But many economic fundamentals seem to support the idea that this pick-up in consumer spending, and sentiment, could have legs.
The employment market continues to heat up. There’s also the possibility of infrastructure spending and tax cuts in the new year, which could boost economic growth further.
Additionally, the importance of the stock market indexes trading at new all-time highs shouldn’t be dismissed. When investors look at their investment statements and they see those balances rising, it can also boost the animal spirits. They feel richer. And when they feel richer, they spend more.
The First Rule of Investing: Buy the Best
If consumers are opening their wallets again, then investors should be in the very best of the retail group.
And there can be only one name that falls into that category.
Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA).
Ulta sells beauty products and operates salons in 949 stores in 48 states and the District of Columbia.
Right now, ULTA stock is the only retailer that is producing double-digit comparable-store-sales quarter after quarter and year over year. Additionally, unlike most other retailers in 2016, Ulta didn’t see its business slow during the year. Quite the opposite occurred. It has actually accelerated.
Here are the quarterly comparable-store-sales for 2015 and 2016.
|Fiscal 2015 Comparable Stores Sales Growth||Fiscal 2016 Comparable Store Sales Growth|
|Q1: 11.4%||Q1: 15.2%|
|Q2: 10.1%||Q2: 14.4%|
|Q3: 12.8%||Q3: 16.7%|
|Q4: 12.5%||Q4: ???|
What other retailer is doing comparable store growth of 16.7% like Ulta did in the third quarter of this year?
It’s not even close. Ulta stands alone.
Why Ulta Crushes It
How is ULTA stock able to achieve this kind of success when other retailers have been faltering?
Let’s be frank. It helps that it’s not an apparel retailer. Makeup, in particular, has been an especially strong retail product line for the last several years and shows no signs of slowing down.
But outside of its products, it’s also doing several things right that allow it to trounce the competition.
1. Best Rewards Program In the Business
First, it has the best rewards program, the Ultamate Rewards, in the retail industry. The rewards program now accounts for 90% of all sales.
The reason it is so great is that it legitimately gives customers rewards. It makes it easy to accumulate points, which can then be applied to other products. So a customer in the program, knowing that they will get good freebies, will try and make as many purchases as they can through the rewards.
Not only will they buy their makeup at Ulta, but also buy their shampoo and even get their haircut there just to accumulate points.
The rewards program also provides a moat against Amazon.com, Inc. (NASDAQ:AMZN) and other online retailers. Why would women buy their makeup on Ulta.com instead of Amazon, which often carries the same items, sometimes for less? Because they don’t get points on Amazon.
Points, and the rewards that come with them, are the name of the game. It has created an incredibly loyal customer base.