Ulta: Is This Your Opportunity to Buy?


Ulta Salon, Cosmetics, & Fragrance (NASDAQ: ULTA  )  fell hard after reporting earnings on Dec. 5 and the stock has yet to regain its strength. It had been up over 29.5% year-to-date on Nov. 5, but has fallen over 28% since then. Ulta is now negative for the year, falling about 7% as the S&P 500 has risen more than 24%. Let's take a look and see if this is an opportunity to buy relative to peers Sally Beauty Holdings (NYSE: SBH  ) and Regis (NYSE: RGS  ) . 

The beauty retail giant
Ulta is the largest beauty retailer in the United States, providing a one-stop shop for all the beauty and salon products and services a consumer could desire. The company is dedicated to providing the highest-quality products at affordable prices, which is the recipe for success in any industry. Ulta currently operates over 650 locations in the United States, along with its very popular website, www.ulta.com.


The results
After the close on Dec. 5, Ulta reported third-quarter results that disappointed analysts. Here's an overview of the report:

Metric Reported Expected
Earnings Per Share $0.72 $0.74
Revenue $618.8 million $621.9 million

Earnings per share rose 18.6% and revenue increased 22.4% year-over-year, driven by same-store sales growing 6.8%. Gross profit rose an impressive 24.9% to $231.66 million, as the gross margin expanded 70 basis points to 37.4%. A quarterly record 55 new stores were opened during the quarter, bringing Ulta's total to 664 stores in 46 states. Even though these metrics missed the consensus estimates, it still made for a great quarter.

The cause of the decline
With all of these positive statistics aside, the true issue analysts and investors had with Ulta's quarter was its guidance for the fourth quarter. Ulta now expects to earn $1.07-$1.10 per share when analysts expected $1.24. The company expects revenue in the range of $853 million-$867 million while analysts wanted to hear $895 million. The new expectations are much weaker than what the company originally projected and Ulta stated that the decrease was a result of "softer retail sales trends at the end of the third quarter which are expected to continue." This is the weakest guidance I have ever seen out of Ulta, so a large sell-off was warranted. 

Steep sell-off
Prior to the earnings release, Ulta's stock was trading at $118 a share. After the results were announced, Ulta's stock was hit hard, dropping about 18% after-hours and finishing down 20.54% in the trading session that followed. The stock price continued its decline over the next several days, but it has rebounded slightly and currently sits roughly 20% below the $118 mark. 

How cheap is it?
At current levels, Ulta is trading about 31 times current earnings and 24.7 times forward earnings. According to YCharts, Ulta's five-year average price-to-earnings ratio is 35.73, meaning it is much cheaper than usual today. A smaller multiple is warranted today due to the dismal earnings that will come in the fourth quarter, but this is not the case in the long-term picture. I believe Ulta could consistently trade at a multiple of 30-32 until its growth slows several years from now.

Competition? Not so much...
Sally Beauty
(NYSE: SBH  ) and Regis (NYSE: RGS  ) are two of Ulta's competitors in the beauty products and services industry. Sally Beauty is an international retailer and distributor of professional beauty products. The company sells and distributes over 10,000 products to more than 4,700 locations in 12 countries. Regis is the largest owner, operator, and franchisor of hair salons in North America and the United Kingdom. It operates or owns interest in 9,752 salons under numerous brand names, where it also sells haircare and hairstyling products.

Ulta, Sally, and Regis have all reported earnings over the last several weeks, so here's a comparison of what each company accomplished in the recent quarter:

Company Ulta Sally Regis
Earnings Growth 18.6% (2.6%) (87.5%)
Revenue Growth 22.4% 2.7% (7.3%)
Comp-Store Sales Growth 6.8% 0.4% (5.4%)

There really is no competition for Ulta when it comes to Sally Beauty and Regis, and the numbers show it clearly. I believe Sally and Regis are untouchable in the market today and both need to make major moves to change this opinion. It is always best to follow the consumer when it comes to the beauty products and services industry, and consumers are shopping at Ulta. 

A French powerhouse
Sally and Regis are showing little traction in the marketplace today, but Sephora has been growing consistently for the last several years. Sephora is one of the largest fragrance and cosmetic companies in the world, and it is the largest competitor to Ulta. The company deems itself the market leader in France, Italy, and Russia, and has growing presences in North America, China, Latin America, and the Middle East. Sephora is owned by Louis Vuitton Moet Hennessy  (NASDAQOTH: LVMUY  )  and currently operates 1,413 locations.

Louis Vuitton does not give results for Sephora specifically in its earnings reports, instead it talks about Sephora as a part of its selective retail segment. In the first nine months of 2013, revenue from selective retail rose 15.9% to 6.32 million euros compared to 5.45 million euros in the same period in 2012. The company added that Sephora has a "growing market share in all key regions" and it is showing strong growth in online sales. At this time, it seems that Sephora and Ulta are growing in harmony, so I do not see the two as threats to each other. However, if Sephora sets its sights on rapid North American expansion, we would have a much tougher decision to make.

The Foolish bottom line
Ulta is still the long-term growth story we saw it as earlier this year, but the promotional environment this holiday season has made its run higher a little more challenging. It has sold off dramatically since missing earnings in early December, but I think this is merely a speed bump and Ulta will regain strength quickly. I believe the decline of over 20% is an opportunity for an investor to initiate a position and add to it if the decline persists. 

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 29, 2013, at 1:30 AM, Shauna510 wrote:

    I have thought about buying this stock but have held back for a couple of reasons. I am a beauty fanatic and am embarrassed to admit that I spend an obscene amount of money on beauty products. I shop at both Ulta and Sephora and am completely disappointed in Ulta recently. I find these two companies to be very close competitors with Sephora beating Ulta on many levels. First, Ulta is perpetually out of stock of many popular items. It doesn't matter what I'm looking for, they are out. When I go back on days they re-stock, they are STILL out of stock, sometimes for weeks. Second, their sales staff receive very little training and have no idea what products to recommend in contrast to sephora employees who seem to be much more knowledgeable about the products. Third, the three Ultas in my city are always a wreck. The displays are poorly stocked with makeup and product smeared all over the place with empty testers and nothing to clean hands with. Sephora always has samples and testers available in a clean display with ample stations stocked with makeup remover and tissues to clean up with. Finally, ulta frequently sends out coupons with fine print that says it is not valid for certain products. I find that nothing I wish to purchase is covered by the coupon. When sephora issues a sale, it pretty much applies to everything, and their rewards program is much better. Reviews on Yelp and makeup alley from customers who shop there pretty much validated my own experience with this store. If they've missed out on thousands (sad i know) of dollars from little old me to Sephora, I am loathe to see how much they've lost from other shoppers. It doesn't matter how many great products they introduce to the store, if they're out of stock, they're not selling it. If they were more readily stocked, trained their employees better, issued better rewards, and kept the place tidier, it would be phenomenal. Until they address these issues, I will avoid this stock, continue to shop at Sephora for higher end products and my local drugstore for the lower end products and I'm sure many women feel the same way. I've recently joked that if I won the lottery, I would conduct a hostile takeover of Ulta and whip that place into shape! If they continue on this path they could be in trouble. Such a shame :-/

  • Report this Comment On January 02, 2014, at 10:58 AM, reader995 wrote:

    I just bought in at the drop. I agree with much of what the author said. ULTA has high growth potential and no debt. They also understand their consumer well. Not sure where the above commenter is from, but in my large metro area, the stores are neat, well merchandised, stocked, and their staff is very friendly, helpful and knowledgeable. I suspect that is the case in most areas, as the company's growth speaks for itself. Sephora is much more exclusive and caters to a smaller segment of the population. ULTA competes against mass, drug and department store channels as well, there product range and service quality drive loyalty. Shoppers are invited in with their coupon, and typically walk out with several more items.

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