Shares of beauty retailer Ulta Beauty (ULTA -0.56%) have more than tripled the total return of the S&P 500 since their initial public offering in 2007, rising more than 1,300%. With its sales up an almost identical amount over that time, Ulta has delivered high-teens growth rates and steadily rising profitability to its shareholders for years.
However, after guiding for low single-digit sales and earnings-per-share (EPS) growth in 2024 while warning of a consumer spending slowdown, the company has seen its share price plummet over 25% in the last two months.
As concerning as this slowdown is over the short term, Ulta's new once-in-a-decade valuation could prove that this sell-off is overdone. Here is why Ulta Beauty looks like an unstoppable multibagger to buy amid its current temporary struggles.
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43 million loyalty members strong
While growth may slow in the upcoming year as consumers wrestle with rising interest rates and credit card debt levels at all-time highs, Ulta's customer loyalty should help it ride through this potential downturn. Home to 43.3 million Ultamate rewards members -- which grew by 8% compared to last year -- the company generates an incredible 95% of its sales through this program.
Counting more than one in eight Americans as members, Ulta is one of the top beauty destinations for shoppers in the U.S., alongside its luxury-focused peer Sephora (owned by LVMH). Perhaps even more critically, the company remains very popular among Gen Z. Surveying teenagers in the fall of 2023, Piper Sandler reported that 32% of respondents named Ulta their top beauty destination, with Sephora receiving 37%.
To give some context to this popularity among teens, consider that the same survey showed that Netflix and YouTube received 29% scores among video streaming options, highlighting just how impressive Ulta's rating is in its beauty niche.
Another reason to be optimistic about Ulta's ability to overcome the challenging macroeconomic environment is that it typically benefits from the "lipstick effect." Historically speaking, the lipstick effect shows that cash-strapped consumers tend to forgo big-ticket purchases in favor of small indulgences like lipstick or other items in the beauty category. This extra bit of resiliency makes Ulta a unique investment opportunity in the retail market, especially considering its other market-beating indicators.
Ulta's market-beating qualities
Ulta Beauty boasts a return on invested capital (ROIC) of 61%. This figure has gradually improved over time, except for a drop during the pandemic.
ULTA Return on Invested Capital data by YCharts
ROIC measures a company's ability to generate net income from its debt and equity -- the higher, the better. Ulta's 61% ROIC is promising because it ranks in the top decile among its peers in the S&P 500. Historically, stocks with high and rising ROICs have vastly outperformed their lower-ranked peers, according to this article that analyzed the Motley Fool's investable stock universe.
Whether adding to its 1,385 store count, creating more of its 510 shop-in-shops with Target, or building out its e-commerce capabilities, Ulta and its robust ROIC show a knack for generating outsize profits from its investments.
Thanks to this immense profitability, Ulta has handsomely rewarded shareholders over time through stock buybacks. Reducing its share count by 25% over the last decade, Ulta has "juiced" its EPS figures, helping it to grow faster than net income.
ULTA Net Income (TTM) data by YCharts
These repurchases are even more exciting, considering that S&P Global found that stocks with the heftiest buyback rates in the S&P 500 outperformed their peers by 5.5 percentage points annually from 2000 to 2019.
The cherry on top for investors? Ulta recently announced plans to buy back $2 billion more of its shares (roughly 10% of its market capitalization) -- and its stock currently trades at a once-in-a-decade valuation.
A once-in-a-decade valuation
Trading at its lowest price-to-earnings (P/E) ratio of the decade (outside of a brief moment in 2020), Ulta could generate even more value for shareholders through its significant buyback plan.
ULTA PE Ratio data by YCharts
This discounted valuation provides more bang for their buck regarding management's planned share repurchases and boosts the company's potential to keep growing its EPS.
Ultimately, despite the shorter-term consumer spending headwinds facing Ulta, the company's loyal customer base, top-tier profitability, and massive buyback plan make it too enticing to pass up at today's once-in-a-decade valuation.
