Ulta Beauty: Unleashing Beauty Empire And Investment Potential

Introduction:

Ulta Beauty, Inc. (NASDAQ:ULTA) is the leading beauty retailer in the United States. In a world where self-expression and beauty are key, ULTA has been able to build an empire by offering a vast array of beauty products, a captivating shopping experience, and salon services all under one roof. But what does the stock have to offer apart from mascara and lipsticks?

Let’s find out in this article, where we will uncover Ulta Beauty’s growth potential and financials and explain why we consider ULTA stock a buy at its current price.

The U.S. Largest Beauty Retailer

Ulta Beauty, Inc. is the largest beauty retailer in the United States, with over 1,250 stores and over 25,000 products, according to the company website.

The company has an excellent management team with a lot of experience within the health and beauty space. The leadership team has experience in some world-renowned brands including PepsiCo (PEP), Procter & Gamble (PG), and The Home Depot (HD), to name a few. In addition, the management team of Ulta Beauty consists of multiple women, which is refreshing to see.

The company targets a specific type of customer known as “The Beauty Enthusiast.” What ULTA classifies as a beauty enthusiast can be best seen in the following slides from the latest earnings presentation.

So what exactly is a “Beauty Enthusiast”?

Punished In the Last Quarter

Ulta Beauty’s shares slumped over 10% in after-hours trading on May 25th after the company reported fiscal Q1 earnings (period ending April 29). This was due to margin contraction.

The company reported $6.88 EPS on net sales of $2.6B for the quarter. In addition, the company decreased its net sales forecast slightly from $11B-$11.1B to $10.95B-$11.05B. Furthermore, they trimmed their operating margin from 14.7%-15.0% to 14.5%-14.8%. Nonetheless, sales guidance and EPS guidance for the full year remain unchanged.

Nonetheless, the company remains strong at historically low valuations, as can be seen in the following chart. The company is currently trading at a P/E Ratio not seen since the COVID-19 pandemic stock market bottom. Currently, the stock is even more attractively valued compared to 2014, when ULTA was trading at around $80 per share.

ULTA: Robust Growth, Resilient Margins, and Strong ROIC

Now let’s take a look at ULTA’s financials. As can be seen in the chart below, ULTA has a solid track record of growing its revenues over the years. The company saw a small clump in 2021, where gross margins also took a small hit, which took them from 41.19% to 37.95%.

Unfortunately, we believe the remainder of the year and 2024 could be pretty tough for ULTA, which they acknowledge as the market remains rough as people lost purchasing power due to elevated levels of inflation, which are especially rough on the consumer discretionary sector.

As can be seen in the chart below, the revenue growth is pretty impressive at around 20% each year. 2022 was an extraordinary year for the company where revenue grew around 40% YoY, this was after the company had a bad year in 2021. We believe the company is now reverting back to the mean, with rates between 13-15% revenue growth YoY. We expect gross profit growth to be higher, as the company has pretty impressive pricing power with gross margins of over 40% to be expected for years to come.

The possibility of a recession and the possibility of interest rates remaining high for longer than expected might put some pressure on the company's sales in the short term.

Now let’s discuss some important metrics, starting with the table below.

Currently, ULTA has a 5Y Revenue CAGR of 8.73% showing that Ulta Beauty has been able to grow its revenue at a steady but consistent pace over the last 5 years.

Their free cash flow currently sits around $1,009.70M, resulting in a 5.80% FCF Yield. In theory, this means ULTA could buy itself back in just over 17 years. In addition, operating income declined slightly, while capital expenditure increased further, which is due to the rough macro environment the industry is going through.

Furthermore, Ulta Beauty has a ROIC of 66.81%, which can be considered excellent. This indicates that for each $100 it invests in its business the company generates an additional $66.81 in operating income.

Again, the chart below shows the steady growth the company has accomplished over the years.

Technical Analysis

As can be seen in the chart below, the stock has been in a steady uptrend reaching a new all-time high right before the company released its latest earnings on the 25th of May. These earnings which we discussed in this article caused the stock to drop almost 18% until it recently reached its bottom around $402 on the first of June. Recently the company rallied 17% over the month of May reaching $470 to close the month, but the stock is still down over 15% since the 1st of May.

Currently, the stock is at an important point. The purple rising trendline was considered a strong support level since the stock market bottomed back in March of 2020. Initially, this level seems to be rejected, but ULTA might be able to break above this level this week, keep in mind that this level also coincides with both the 50 and 200 EMA’s, which further indicated the strength of this level. If ULTA is able to break above and hold this trendline, the stock should have some more room for upside.

If this level gets rejected, the stock could reach new lows again, but there should be some solid supports along the way. For example, the 20 EMA and the $463 level (FIB Support), and even the $415 level, which would provide a great dip buying opportunity.

Is ULTA a Buy?

In conclusion, Ulta Beauty stands as the unrivaled beauty retail giant in the United States. ULTA has successfully captured the hearts (and wallets) of consumers across the nation.

Despite experiencing a temporary setback in the last quarter due to margin contraction, Ulta Beauty remains a strong contender, which is currently at a historically low valuation. The stock is currently trading at a price-to-earnings (P/E) ratio not seen since the COVID-19 pandemic market bottom, making it particularly attractive for investors. The company's solid financial track record, with steady revenue growth and impressive gross margins, further supports its investment potential.

While the market may present challenges, such as the potential impact of a recession and high-interest rates, Ulta Beauty's resilience and pricing power are expected to sustain its growth trajectory. The company's management team, boasting extensive experience in renowned brands, adds to its strength and adaptability.

From a technical standpoint, Ulta stock has been in a steady uptrend, reaching new all-time highs before the latest earnings release. Although the stock experienced a temporary decline, it has shown signs of potential recovery, with key support levels and moving averages acting as indicators of its strength. A breakthrough above the purple rising trendline could signal further upside potential.

Considering Ulta Beauty's position as the largest beauty retailer in the United States, its strong financials, and the potential for stock price recovery, we believe ULTA is a compelling buy for the long-term investor at its current price.

Nonetheless, it might be wise to wait for a break and hold above the purple trendline to get a better risk/reward setup or wait for ULTA stock to drop down again in case of a trendline rejection.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.