Ulta Beauty Inc (NASDAQ:ULTA) has been a long-time favorite of mine given its strong franchise model and fundamentals. As the largest beauty retailer in the United States, it offers 20,000 different products including cosmetics, fragrances, bath and skincare products and hair care.
Each location also houses a full-service salon. The company operates 1,074 stores in 48 states and D.C.
Slowing growth and competition concerns have weighed significantly on the shares, but the company’s latest quarterly results went a long way in relieving those fears and showed investors that ULTA stock had good price appreciation potential from current levels as its growth story remains intact. While EPS of $2.75 (which was helped by 15 cents thanks to the extra week) was 3 cents less than expected, it still showed solid growth in absolute terms. The small miss was actually a relief to investors given the highly competitive environment.
Top-line growth was solid, with total sales up 15.7% excluding the impact of the extra week. Comparable-store sales gained 8.8%, with transactions up 6.2% and ticket size up 2.6%.
Three Catalysts for Future Growth at ULTA
I am very confident in ULTA’s future growth prospects for a few reasons.
The first is that there is still ample room for expansion of its current store base of 1,074. Management will open about 100 new stores this year, and given that they feel new stores are performing well and comparable store sales are strong, I believe ULTA can make it to the high end of its goal between 1,400 and 1,700. The company could increase its number of stores more than 50%.
Second, cosmetic sales should begin to come back to life this year as manufacturers refresh their product lines. In addition, ULTA is adding fast-growing new lines, including Estee Lauder, NARS and COVERFX. This should help the company manage the competitive environment, as will the continued growth of its rewards program — members were up 19% from last year to 27.8 million.
And lastly, ULTA is meeting online competition with its own very strong e-commerce business. Sales were up 64.7% for the year and 60.4% in the fourth quarter. In 2017, e-commerce sales were just under 10% of the total, and management believes they are additive to the total and will not take sales from stores.
I like that management’s guidance for the January 2019 fiscal year was very upbeat. Total sales are expected to grow in the low teens. Comparable store sales will be up 6%-8%, including a 40% gain in e-commerce. Same-store sales will improve as the year goes on as comparisons become easier and new cosmetics hit the stores.
While competition will pressure margins, this should be compensated for on the bottom line by lower taxes and the company’s share buyback plan. As such, I expect EPS to increase from $8.16 last year to $10.80 this year.
And if the company can regain momentum in cosmetics, EPS of $13 in 2019 is possible. The stock is very attractive at 16.5X this estimate and I see it as a strong buy below $222.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
