Ulta Beauty Inc (NASDAQ:ULTA) announces first-quarter earnings Thursday, May 25, after the markets close. They’re expected to deliver home-run results. Naturally, investors see a bright future for ULTA stock, I certainly do.
However, before you wire the money to your brokerage account, you might want to consider a cheaper alternative. I’m not saying you should buy Sally Beauty Holdings, Inc. (NYSE:SBH) stock, just ponder the idea of value versus growth before making a decision.
At the end of this article, we’ll all be confident which is the better stock.
To evaluate the two stocks, I’m going to look at three specific areas, grading each company on a scale of 1 to 10 (10 being the cat’s meow and 1 a dog’s breakfast).
The categories: Valuation, Stock Performance, and Financial Statements. The winner is the stock with the higher score out of 30.
Valuation
This isn’t a battle ULTA stock can win, but let’s go through the motions just the same. To make this quick and easy, I’ve taken Morningstar’s data for the P/E, P/B, P/S, and P/CF ratios and multiplied them together.
| Metric | ULTA | SBH |
| P/E | 44.6 | 10.9 |
| P/B | 11.6 | 1.0* |
| P/S | 3.8 | 0.6 |
| P/CF | 28.8 | 8,5 |
Ulta’s product after multiplying the four ratios is 56,620; Sally Beauty’s is 55.6, or a tenth of 1% of Ulta’s product. But SBH’s number is low because it has negative equity. There are two reasons why this is so.
First, Sally Beauty has $110.7 million in accumulated foreign currency losses. Second, and far more important, it paid a $2.3 billion special dividend in 2007 to Albero-Culver shareholders when it was separated from its former parent. As long as it keeps buying back shares — about 25% of its stock over the past five years — it’s going to have negative equity.
Note: To make the math work, I gave SBH a price-to-book multiple of one.
ULTA score: 2
SBH score: 10
Stock Performance
Here, I’m going to use a weighting system where each company’s one-year return is worth 20%, 30% for its three-year return, and 50% for its five-year return. Whoever’s is higher gets 10 points with the runner-up getting five points unless one of them has a negative return in any period in which case they get zero points.
| Return | ULTA | SBH |
| 1-Year | 41.0% | -36.7% |
| 3-Year | 50.4% | -11.4% |
| 5-Year | 26.1% | -7.8% |
Source: Morningstar.com
ULTA score: 10
SBH score: 0
Financial Statements
When I make a quick cursory comparison of two companies, I take a nibble from the income statement, the balance sheet, and the cash flow statement. Usually, I get a picture of a company’s strengths and weaknesses from this exercise.
The three metrics are operating margin for the latest 12 months, net cash or debt, and free cash flow as a percentage of revenue. The winner of two out of three categories gets 10 points; the loser gets five points.
Financial Statements: ULTA vs. SBH
| Metric | ULTA | SBH |
| Operating Margin | 14.2% | 12.3% |
| Net Cash/Debt | $415M Net Cash | $1.8B Net Debt |
| FCF as % of Revenue | 16.5% | 11.4% |
ULTA won this by a long shot; I’m being generous giving SBH any points.
ULTA score: 10
SBH score: 5
Bottom Line ULTA Stock vs. SBH Stock
Ulta wins this three-category contest by seven points, 22-15. Although the deficit isn’t that great, the two companies are at very different phases of their development.
Sally Beauty is in the middle of a restructuring that began in earnest in February and is ongoing. Its Q2 2017 results weren’t terrible, and it’s making progress on moving forward in the beauty business. Unfortunately, it won’t be with Sally Beauty’s retail boss, Sharon Leite, who recently resigned from the company.
Over at Ulta Beauty, it’s delivering double-digit same-store sales growth at its physical locations while giving Amazon.com, Inc. (NASDAQ:AMZN) a run for its money online. E-commerce sales have grown 50% or more a quarter and now represent more than 15% of its overall revenue.
Ulta Beauty is easily one of my favorite retail stocks. I don’t expect anything but good news on Thursday. Should the markets not like the results and ULTA stock drops on the news, be ready to buy some more.
Value often beats growth over the long term. In this case, I just don’t see it happening.
ULTA is the better stock.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
