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).
Ulta Beauty Inc (NASDAQ:ULTA), the American brick-and-mortar and online beauty retailer, which specializes in beauty products for both men and women, including salons, has been the best retailer in the country the last few years.
In the second quarter, the company did it again, posting double-digit comparable sales that every other retailer can only dream about in this challenging retail environment.
Yet shares sold off big and have barely recovered. Investors, apparently, fear the good times are over and that growth has only one way to go: and that’s down.
Is this a rare buying opportunity in Ulta or are the fears warranted?
ULTA Still Has the Best Comps in the Business
On Aug. 25, Ulta reported its second-quarter results against the back drop of general retail angst. There were already worries that the company was going to be “Amazoned.”
Yet, it announced same-store comparables up 11.7%, on the heels of a 14.4% comp in the year ago period.
Combined, that’s 25% comparable store sales growth over the last 2 years. That’s an incredible performance. However, the bears latched onto the fact that this was the first quarter since 2013 that the company did not outperform its own comparable guidance forecast.
Retail comps were up 8.3%, including 7.7% for the salon.
E-commerce jumped 72.3% to $96.3 million from $55.9 million and made up 340 basis points of the 11.7% quarterly comp.
Product strength was broad-based with prestige products driving the majority of the growth. That includes the launch of MAC and other popular brands. Basically, it’s not seeing growth from old drug store brands. Higher end and exclusive products are the driver.
Skincare, fragrance and hair care all gained momentum in the quarter.
Loyalty Program is Still the Key
Once again, Ulta’s Ultamate Rewards program took center stage, as membership jumped to 25.4 million, up over 20% year-over-year. It has grown at that 20%-plus rate all year.
This program is key to the company’s success, as reward members tend to shop more often and buy more. It also gives Ulta a competitive advantage over others, like Amazon.
Why?
Its Ultamate Rewards program is the most generous in the retail industry and keeps customers coming back for more. I will make sure I buy my everyday items like 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.
Once you get to the Platinum level, the company will send you free samples in the mail and everyone gets a birthday gift upon visiting the store, usually a mascara or other beauty sample.
These are nice touches. It makes the customer feel good and that keeps them loyal.
In today’s retail, that matters.
Still Growing in Brick and Mortar
While other retailers are shutting down stores, Ulta is doing the reverse. In fiscal 2017, it will open 100 net new stores, remodel 11 and relocate seven. Brick and mortar remains the backbone of its business.
It is dipping its toe into the urban market as well.
In 2017, it will open five urban stores in key shopping meccas 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.
The North Michigan Avenue store has already opened and the company said they are pleased with the sales results coming in from it already.
Raised Full Year Guidance
There was no big beauty trend pushing sales in the first half of the year like in years past. Last year, it was red matte lipstick and the year before that, contour products were flying off the shelves. But the new product pipeline is expected to improve in the second half of the year, especially in prestige products.
Ulta was conservative with third quarter guidance, giving a range of 9% to 11%, which again spooked some of the bears. But that is coming on the back of the incredible 16.7% comp in last year’s quarter.
Still, it raised full-year comparables to the range of 10% to 11% from 9% to 11%. It also raised its guidance for e-commerce sales growth to a range of 50% to 60% from 50%.
Expectations Too High
Ulta was priced for perfection going into the second quarter report. Even the company’s CFO said on the conference call that it has seen so much growth in the last few years that it will be nearly impossible to repeat that same level even though it’s going to try.
Expectations needed to come down.
Now that shares have fallen 20% over the last three months, the shares look a lot more attractive. The forward P/E has come down from the mid-30s to just 24x. It’s still expected to grow earnings by 28% this year and another 17% next year. Ulta’s earnings growth continues to accelerate as you can see in this five-year chart.
The question investors have to ask is: how much do they want to pay for this kind of earnings and sales growth?
In my mind, the answer is easy.
Ulta continues to be the best retailer in the country. I have added to my own personal long-term position on the recent sell off.
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.
