SUMMARY

1. As the retail landscape continues to experience a sea of changes, many companies struggle to keep up with the competition.
2. Ulta Salon has proved to be exceptional as it has grown sales, profits and store count over the years.
3. CEO Mary Dillon demonstrated to shareholders that she is more than capable of directing the company’s growth.

 

1. Introduction

Investing is never easy because it requires people to think further down the road than they would normally do. Most of us did not envision the way technology will completely change the way we communicate but look at where we are now.

The same can be said of the way we make our purchases.

In 2016, Wal-Mart announced that it will be closing more than 100 stores. Other retail giants such as Macy’s, Nordstrom and Sears have barely survived the seismic shift in the way consumers shop for goods.

All that said, how can one continue to remain invested in retail?

This is because Ulta Beauty Inc. (NASDAQ: ULTA) is about more than just hair. This innovative and rapid retail growth story offers more than 20,000 products from approximately 500 well-established and emerging beauty brands across all categories and price points, including Ulta Beauty’s own private label, the Ulta Beauty Collection. The company’s healthy same-store sales, improving margins, and loyal customers make Ulta a company you need in your balanced, diversified portfolio regardless of your gender (or hairstyle).

 

2. Business Overview

Chicago-based Ulta started out from humble beginnings as a discount beauty supply store in the early 1990s. The offerings in department stores in those times were limited and the company saw an opportunity to create a “one-stop shop” for consumers to research, test and purchase cosmetics, skin care products, shampoos, fragrances and other beauty products. Today, the company even expanded to offer in-house salons which offer hair services and manicure.

Ulta is the largest beauty retailer in the country with approximately 974 stores in 48 states in the country. The company currently has more than 23 million active loyalty members which generates more than 90% of the total sales in 2016. The membership base also provides a community that is key to the company’s online growth strategy. In fact, internet sales will provide support for the brick-and-mortar stores via marketing and promotions and simultaneously providing a shopping and learning platform for shoppers who flock to Ulta.

In order to support its rapid growth, management has committed to invest in supply chain capacity and capabilities such as distribution facilities and core merchandising systems. By investing in its infrastructure, the company will be able to sharpen its efficiencies across various functions such as space planning and inventory forecasting. Last but not least, as the company continues to find means to strengthen its moat from online competition, spending on online infrastructure enable it to raise its delivery standards and ship its products within 48 hours.

3. Financial Position

Source: Ulta Beauty Investor Relations

In terms of financial position, Ulta Beauty has been firing on all cylinders. Net sales and net income grew by a compounded annual growth rate (CAGR) of 22% and 28% respectively. As retailers continues to face headwinds from e-commerce platforms such as Amazon.com, Ulta Beauty has been able to grow its store count over the last five years from 550 to 974 which is very impressive – considering that most retailers are shutting down stores or worse, going out of business.

Being in a solid financial position will allow the company to fund its expansion in terms of both physical space and online presence.

4. Potential Risk

In the retail industry, forming and sustaining an advantage over other players in the market is extremely difficult. As mentioned previously, online competition will always be Ulta Beauty’s biggest threat. Yet, despite the onslaught of Amazon.com and other giant retailers such as LVMH’s Sephora, Ulta has managed to establish itself as a profitable business with an expanding niche. Should competition prove too difficult to fend off, investors will need to re-evaluate its standing before buying the company.

Mary Dillon has been the CEO of the company since July 2013 and needless to say, she has done a fantastic job in taking the company to where it is today. She also sat on the board of directors for Starbucks and both retailers have performed exceptionally well. This speaks volumes of her commitment and competence when it comes to stewarding the business. If she steps down, it will be extremely difficult for the next CEO to fill her shoes.

5. Conclusion

Source: Google Finance

The company has recently fallen off its 52-week highs. While we should not make investments based on price movements, buying a business like Ulta as a slight discount is never a bad deal. The company’s financials are extremely attractive and can make it a compelling investment today.

Marcus Ho
Research Analyst, Mind Kinesis Value Investing Academy

Disclaimer: Please note that all information stated in this article is just for education purpose only and should not be used as any form of recommendation or advice.