Ulta Beauty Hits the Bull’s-Eye With Its Target Deal

A partnership between Ulta Beauty (NASDAQ:ULTA) and Target looks promising. Ulta stock rose 7.4% on Nov. 10 as it announced a deal with the popular retailer.

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The idea is that Ulta will create 100 “shops within a shop” at select Target stores for its beauty products. Each shop will be 1,000 square feet and sit next to related Target products. Ultimately there could be hundreds of such shops. Target has about 1,850 stores. There will also be an Ulta section on Target’s web site.

It’s not a first for either Target or the beauty segment. Target pharmacies were rebranded to CVS Health (NYSE:CVS) in 2015. In 2005 LVMH (OTCMKTS:LVMUY) put its Sephora line into JCPenney (OTCMKTS:JCPNK) stores. That deal didn’t work so well, the two winding up in court as JCPenney swirled into bankruptcy.

Dillon’s Empire

Ulta was founded in 1990 by a veteran of the Osco Drug chain. Today’s company was born in 2013, when former McDonalds (NYSE:MCD) executive Mary Dillon was recruited as CEO. Ulta now has over 1,100 stores. Target could, in time, more than double its footprint without significant investment.

With the Target announcement, Ulta stock has market cap of $15 billion, more than double its annual sales and 53x earnings. The share value peaked right before the pandemic at nearly $300, plunged by nearly half, and had been bouncing around the $240 level until recently. The chain was proactive in closing stores as the pandemic struck, only reopening at the end of July.

Under Dillon, Ulta has grown by double digits every year, although growth has slowed in recent years as the company has matured. The stores, usually about 10,000 square feet, include a salon of about 1,000 square feet. There workers do hair treatments, makeup and eyebrows, recommending products from the store to maintain the look.

I last wrote about Ulta stock in May, saying the sale on shares was over as it approached its April earnings release. That rise was spurred by happy talk from analysts, including yours truly. Most still like it, although their price target of $271 for the next year is now in sight, shares opening November 11 at $265.

The Target Deal

Under the terms of the partnership, Ulta will only be selling products inside Target. Target employees will be trained by Ulta to serve customers. Ulta products will also be integrated into Target’s e-commerce efforts, which include pick-up and same-day delivery services.

Because its stores sell food and other essential products, Target has sailed through the pandemic. The shares are up 27% for the year so far. For Target, the deal represents a last stab to the heart of mall-based department stores, most of which depended on beauty supplies.

Media targeting women and luxury goods celebrated the deal, with Elle writing, “your two favorite places are becoming one.” That sentence illustrates how far Target has come under CEO Brian Cornell, from a discount chain akin to Walmart (NYSE:WMT) into a department store destination.

The Bottom Line

When it comes to picking stocks, especially retailers, I bet the jockey and not the horse. I have long admired Cornell. Dillon is also a winner.

As men increasingly turn to beauty products, and as standards for working from home and appearing on Zoom (NASDAQ:ZM) meetings rise, Ulta stock has a long runway of growth. The deal with Target cements its status, turning its products from a treat to a staple.

While the stock is very pricey here, it’s one a long-term investor can buy with confidence. Beyond its capitalized leases, the company only has about $800 million in debt, against $1.15 billion in cash. So long as Dillon remains at the helm, your investment looks safe.

On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear,  available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn.

Article printed from InvestorPlace Media, https://investorplace.com/2020/11/ulta-stock-hits-the-bulls-eye-with-its-target-deal/.

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