Ulta Beauty (NASDAQ: ULTA) is a retail gem that has somehow defied the broader retail trends, returning investors 37% year-to-date and more than doubling the broader retail markets average returns. This jewel in the retail space is reporting earnings after the market closes today, and analysts are estimating Ulta’s robust growth won’t falter.
ULTA is typically a big mover on earning releases with an average move of 7.16% over the past eight quarters (four up, four down). Zacks Consensus Estimates for the July Quarter reflect an EPS of $2.79 on revenues of $1.68 billion, which would represent year-over-year growth of 13.4% and 12.6% respectively.
Management sentiment and guidance drive ULTA on quarterly reports more than surprises on top-or bottom-line metrics.
Ulta Beauty is the largest beauty retailer in the United States, offering customers more than 25,000 products across roughly 500 brands. It is one of the only pure-play beauty businesses in the retail space with no close publicly-traded competitors.
As other retailers are closing their doors, Ulta has been able to expand its footprint. It’s opened 99 stores or more annually for 7 consecutive years, increasing the number of stores by 2.6x since 2011.
The retail space has been closing stores at an exponential rate with more than 7000 announced to close in 2019. This is good news for Ulta, which will be filling some of this brick-and-mortar retail void, expecting to open 70-80 new stores annually for the next “several years”. Currently operating 1,196 stores, analysts are projecting this could hit 1,600 with the potential of expanding its operations internationally.
Ulta has been able to pivot with the shifting retail industry, investing in its digital technology so that modern omnichannel consumer demands are met. Omnichannel customers spend almost three times more than store-only customers, according to Ulta’s latest annual report.
Its e-commerce business has been the fastest-growing channel, currently making up only 11% of revenues but expected to make up a more substantial portion of the business as Ulta continues to invest in its “digital innovation ecosystem”. Ulta management is anticipating to grow its e-commerce business by 20% – 30% for fiscal 2019.
At the end of the past year, Ulta acquired two tech start-ups that focus on AI and augmented reality. This might sound like a strange move for a beauty retailer, but these acquisitions are going to improve their digital platform.
AI is projected to strengthen the firm’s understanding of consumer patterns and personalize buyers’ preferences. Augmented reality is becoming more widely used in digital retail, helping consumers try on products without leaving their homes. These should enhance Ulta’s product offering and further advance their e-com presence.
The Outlook of ULTA Stock
Ulta Beauty is expected to see double-digit top and bottom-line growth for the next two years as this business continues to expand rapidly. Sell-side analysts have been increasing their full-year EPS estimates for ULTA stock, and I believe that this will continue as the firm continues to over-deliver. ULTA stock currently has a Zacks Rank #2 (Buy).
ULTA stock is currently trading at a forward PEG of 1.25x, significantly below its five-year median and below the nonfood retail industries PEG of 1.82x. UTLA’s forward P/E tells a similar story, demonstrating very reasonable valuations. If Ulta’s ostensible future growth can come to fruition the shares are a buy right now.
There are no publicly traded pure-play beauty competitors for me to use as a direct comparison. L Brands (NYSE:LB), which owns Victoria Secret and Bath & Body Works, has a similar customer base to ULTA but have not been able to achieve the same results. LB has lost 74% of its market value over the last five years, with losses exceeding 35% year-to-date. L Brands announced it would be closing another 53 Victoria Secret stores this year, following the 30 that were closed in 2018. This is a quintessential retailer that hasn’t been able to adapt to the changing consumer.
The Bottom Line on ULTA Stock
Ulta’s earnings should be strong, as U.S. retail sales remained strong in Q2. This stock has a ton of potential with its business model catering to all generations. Ulta’s ability to evolve to the needs of millennial and Gen Z consumers has given it the leverage to take control of the space domestically and potentially internationally.
Look for changes in its guidance moving forward as well as management sentiment in the earnings call. It would not be a bad idea to buy a small position in ULTA stock before the release considering that the shares have reacted well to the last two earnings releases. If you are a risk averse investor, wait till after the dust settles to get to buy ULTA stock.
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