In the third part of this five-part series, we look at the largest beauty retailer in the United States, Ulta (NASDAQ: ULTA). Ulta was one of the market's best-performing stocks in 2013 before stumbling late in the year. However, analysts believe it will regain its strength and return to form in 2014. Let's take a look at how Ulta could become one of the best-performing stocks next year and why we should be buying right now.
The beauty retail giant
Ulta Salon, Cosmetics, & Fragrance 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 664 locations in the United States, along with its very popular website, www.ulta.com.
The 2013 rally
Overall, the first 10 months of 2013 were great for Ulta and it had momentum going into the final months of the year. The stock saw a strong run of 26.91%, supported by earnings growth, expansion, and investor confidence. Here's a summary of the four reports released in 2013 and a chart of the rally they supported:
|Quarter||4Q '12||1Q '13||2Q '13||3Q '13|
The December decline
All was going well for Ulta until it released third-quarter results on Dec. 5. Prior to the release, Ulta's stock traded at $118 per share, but the earnings missed estimates on both the top and bottom lines and guidance came in much weaker-than-expected. Ulta now expects to earn $1.07-$1.10 per share when analysts expected $1.24 and it expects revenue in the range of $853 million-$867 million while analysts wanted to hear $895 million. Here's the stock's performance in December and how it reacted to the release on the 5th:
After this dismal announcement, 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, then rebounded slightly, but it still sits well below the $118 level. The steep decline has turned the stock negative for the year, but it could easily make a comeback in 2014.
A promising year ahead
The upcoming fourth quarter may not offer the growth numbers we have been accustomed to, but fiscal 2014 looks very promising for Ulta. Fourth quarter expectations of $1.07-$1.10 would put full-year earnings for 2013 in the range of $3.14-$3.17. Analysts expect earnings for fiscal 2014 to be right around $3.82, which would be an increase of 20.5%-21.7% year-over-year.
At current levels, Ulta trades at about 30.7 times earnings and approximately 24.5 times forward earnings. According to YCharts, Ulta's five-year average price-to-earnings ratio is 35.15, which shows that it is trading well below its historical average. I believe a fair multiple for 2014 is 32, discounted for the dismal fourth quarter and the lost confidence of investors. A multiple of 32 would place the price above $115 per share, an increase of approximately 23% from current levels, and this would still be 15.4% below its 52-week high. I believe a 23% gain will suffice to outperform the overall market in 2014, a conservative outlook based on what the company could actually do.
The French giant agrees
Sephora, the largest fragrance and cosmetics company in the world, agrees with analysts that the beauty industry will gain ground in 2014. The company is the market leader in France, Italy, and Russia, and has growing presences in China, Latin America, and the Middle East. Sephora is owned by Louis Vuitton Moet Hennessy (NASDAQOTH: LVMUY) and currently operates 1,413 locations, a number Ulta could reach one day.
Sephora could be seen as a direct and growing threat to the success of Ulta, but it is focused on expansion elsewhere right now. In Louis Vuitton's recent release, it stated that Sephora is "accelerating its expansion in China... and is strengthening its presence in its new markets of Southeast Asia, Latin America and the Middle East." Meanwhile, Ulta will continue its expansion throughout the United States and the two can grow in harmony. However, if Sephora sets its sights on rapid U.S. expansion, we would have a much tougher situation.
The Foolish bottom line
Ulta is an American giant that consumers have been flocking to for all of their beauty needs. It has grown its store count to 664 and this number could easily surpass 750 by the conclusion of 2014. I believe Ulta will get back on top of its game following the fourth quarter of 2013 and push much higher in 2014; in doing so, it will be the top performer in its industry and outperform the overall market. Watch this one closely and consider adding it to your portfolio.
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