Best Stocks for 2017: Ulta Beauty Inc (ULTA) Stock Is the Best in Retail

Editor’s note: This column is part of our Best Stocks for 2017 contest. Tracey Ryniec’s pick for the contest is Ulta Beauty Inc (NASDAQ:ULTA).

A few months ago, I was somewhat reluctant to choose Ulta Beauty Inc (NASDAQ:ULTA) as my stock pick for 2017 given how much the powerhouse growth stock names were up in 2016, including Ulta. As a value investor, I believed that value stocks might finally start to take the lead in the new year.

Best Stocks for 2017: Ulta Beauty Inc (ULTA) Stock Is the Best in Retail

But I was, thankfully, wrong. 2017 has been dominated by the big growth names, with ULTA stock among them.

And with good reason.

Ulta continues to be the top-performing retailer in the United States. Its holiday results were something most retailers only dream about, and never achieve.

It has taken that momentum into 2017.

The party is still on.

Ulta Has the Best Comps in the Business

On March 9, Ulta reported its fourth-quarter results. Many expected it to be a disappointment, given the challenges the rest of the retailers experienced over the holidays.

Instead, Ulta crushed it with comparable-store sales up 16.6%. Stripping out e-commerce, comparables were still an incredibly strong 12.8%, up 8% in traffic and 5% in ticket. The salon comparables rose 8.8%.

E-commerce also strengthened, rising 63.4% to $154.9 million from $94.8 million in the prior year. It now makes up 380 basis points of the comp sales.

No other publicly traded retailer did double-digit comparable comps in the fourth quarter.

None.

Loyalty Program is Still the Key

I always get asked, “What makes Ulta different from others? Why isn’t it being Amazoned?”

One of the reasons is its Ultamate Rewards program which is the most generous in the retail industry and which makes customers keep coming back for more. I will make sure I buy my shampoo at Ulta, instead of Target Corporation (NYSE:TGT), Walgreens Boots Alliance Inc (NASDAQ:WBA) or CVS Health Corp (NYSE:CVS), just to get the reward points.

At the end of December 2016, Ulta had 23.4 million reward members, up 28% year-over-year. They are loyal and spend more per ticket than non-reward customers.

Oh, and don’t forget, the free gift on your birthday, which is usually a mascara or something similar. It’s a nice touch, and it matters.

MAC Coming Soon

Ulta is finally going to get MAC. MAC is the No. 1 prestige cosmetics brand in the United States. Apparently, it was the most-requested brand by Ulta customers, and should drive website and store traffic.

MAC fans are rejoicing that they will now get reward points for buying their favorite cosmetics.

MAC will be rolled out online in May and in 100 select stores starting in June.

Ulta Beauty has been effective at creating a store experience. It not only has the salon, but its brow bars also bring in foot traffic. The prestige boutiques, such as Lancome, also have boosted sales.

ULTA Stock Is Still Growing in Brick and Mortar

While other retailers are shutting down stores, Ulta is going in the reverse. In fiscal 2017, it will open 100 net new stores and remodel 13.

It is dipping its toe into the urban market as well. Even though it has had Chicago stores for years, it is under-represented in other major cities, including New York and San Francisco.

In 2017, it will open five urban stores, including on Manhattan’s Upper East Side, on North Michigan Avenue in Chicago, on Wilshire Boulevard in Santa Monica and in the Mall of America in Minnesota.

Guidance Was Light: Time to Worry?

If there was one worrisome thing about the fourth-quarter earnings report, it was that fiscal 2017 guidance was considered “light,” with full-year comparable sales guidance in the range of 8% to 10%.

This was after it just crushed it in 2016, with full-year comparable sales of 15.8%.

There were worries that this guidance must mean that ULTA stock sees a slowdown. But not necessarily. The company has always been conservative with comps. In fact, going into 2016, it also gave the same 8% to 10% guidance and obviously easily beat it. In corporate America, it’s better to be too conservative and then easily beat it, then the other way around.

Momentum Is Building

There are a lot of non-believers in Ulta Beauty, simply because the shares continue to soar.

ULTA stock is definitely not cheap. It’s trading with a forward price-to-earnings ratio of 29. But earnings are expected to grow 22.9% and sales are expected to rise 19.3% in 2017.

Ulta’s earnings growth is actually accelerating as you can see in this five-year chart.

Bet against Ulta in 2017 at your own risk.

Tracey Ryniec is an Equity Strategist and Portfolio Manager at Zacks Investment Research. She manages the Insider Trader and Value Investor services. As of this writing, she owned shares of ULTA in her personal portfolio.


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