Best Stocks for 2017: Ulta Beauty Inc (ULTA) Is the Best Retailer in North America

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).

We may never see the kind of retail performance that Ulta Beauty Inc (NASDAQ:ULTA) is putting on in 2017 again in our lifetimes.

Best Stocks for 2017: Ulta Beauty Inc (ULTA) is the Best Retailer in North America

After having a record 2016 and crushing the comps, the standard storyline is that the company wouldn’t be able to continue at such a torrid pace.

But that storyline was wrong.

ULTA stock is producing in a way that no other retailer in America is doing. I encourage all investors to sit up and take notice, because it may never happen again. It’s that rare.

Ulta Beauty Crushed the First Quarter

Because of its hot 2016, Ulta is coming up on some very difficult comps. If you were doing 15% comparable store growth last year, it’s nearly impossible to repeat it again the following year. That would be nearly 30% two-year growth.

Who’s doing that in retail? This is the industry that is supposed to be “dying” due to, Inc. (NASDAQ:AMZN). But don’t tell that to Ulta. First-quarter comparables were up 14.3%, after hitting 15.2% in the first quarter last year.

That is a stunning achievement.

It was driven by an 8.7% increase in transactions and 5.6% growth in average ticket.

Retail comparable sales were up 10.9% with 9.9% at the salon.

Online Growth Continues

Ulta has been stepping up its online game in the last few years. In the first quarter, it opened a much-awaited distribution center in Dallas. These investments appear to be paying off as e-commerce sales rose 70.9% to $104 million versus $61 million a year ago.

Online sales were 340 basis points of the 14.3% comparable sales growth.

Brick and Mortar Is Still Strong

Despite all the doom and gloom about the death of the shopping mall, Ulta continues to open brick-and-mortar stores. It now has 990 stores in the United States after adding 18 more in the first quarter.

It recently opened up its first store on Chicago’s trendy Magnificent Mile, where it will go head-to-head with Sephora which is just two blocks down the street. It is also opening in the Mall of America this year.

One of the big developments in 2017, however, has been its launch of MAC Cosmetics online and in the stores. It wouldn’t say how the brand was doing with the online launch but only said it was pleased with the launch.

In the stores, it is moving slowly and launching the brand first in Iowa, and then will roll out to more stores.

MAC is one of the most popular cosmetic brands in America, so this could result in a big boost for ULTA stock in the next few quarters.

Why Isn’t ULA Stock Being Amazoned?

I’ve said before that Ulta has a secret weapon in its fight against Amazon. It has the Ultamate Rewards program.

In the first quarter, the rewards program grew by 1.1 million members, or 26%, to 24.5 million members. It’s such a good rewards program that members will spend money on things at Ulta they might have bought somewhere else, just to get the points.

Ulta also provides special perks the more you spend, and this translates into warm and fuzzy feelings from the customer. For instance, women are given a free birthday gift every year, usually mascara.

This may not seem like much, and maybe the woman will never even use it, but it will bring the customer into the store where she will likely buy other things at the same time she picks up the freebie. It’s genius marketing and it’s clearly working.

Ulta Raised Full Year Guidance

Ulta has always been conservative on its guidance. After the first quarter, however, it raised full-year guidance in a number of key categories.

It raised full-year comparables to the range of 9% to 11% from 8% to 10%.

Earnings growth is now expected to be in the mid-20% range versus the low 20% range in the prior guidance.

It also gave guidance for the fiscal second quarter of comparables up 10% to 12% after a 14.4% comparable last year.

Ulta is the only national retailer doing double-digit comparables right now. It looks on track to do it two years in a row. It’s a beast.

Is Valuation a Problem?

Even with the outstanding first-quarter results, the shares have lagged. They hit new highs, but haven’t really done much since then.

Ulta trades with a forward P/E of 34. It’s clearly not a value stock. You’re buying it for the growth.

But the market is saying that the growth simply isn’t good enough to move the shares higher.

However, I would be a buyer of ULTA stock on any further pullback if you get one. Ulta has $394.5 million left on its share repurchase program. It bought $51.6 million in stock in the first quarter. I assume they will defend their stock, and jump in to buy on any severe weakness, like a 10% pullback.

Ulta’s comps will one day slow but it doesn’t look like it will happen in 2017.

The only question you have to ask is: how much am I willing to pay for the best retailer in America?

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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