Just How Far Can Ulta Beauty Go?

ULTA Salon, Cosmetics & Fragrance (NASDAQ: ULTA  ) has been the envy of both Wall Street and competitors ever since it went public in 2007. While it suffered along with the rest of the broader market between 2008 and 2009, its shares quickly recovered, becoming one of the best-performing companies out there. Ulta seems to be unstoppable in its industry, which leads investors to wonder just how long Ulta can thrive as it attempts to provide the world with beauty products?

Simply unstoppable
Not only have Ulta's shares been a top-performer on Wall Street, but the underlying business has been just as strong, if not more so. The company's return on equity has been exceptional, consistently coming in at over 20% year after year. Not only that, but it has done this while continuing to open store after store without the use of any long-term debt. Ulta is so strong that it is able to fund its expansion off its net profit alone. Compared to hair care competitor Regis Corporation (NYSE: RGS  ) , its results are all the more impressive.

Company

Net Sales FY 2011

Net Sales FY 2012

Net Sales FY 2013

Ulta

$1.78 billion

$2.22 billion

$2.67 billion

Regis

$2.18 billion

$2.12 billion

$2.02 billion

Source: Yahoo! Finance Ulta's income statement and Regis's income statement.

Clearly, Ulta's blending of a hair salon and retailer of beauty products, their industry's version of "one-stop shopping," is winning over consumers. While Regis also operates a hair salon in each of its stores in addition to selling hair care products to consumers, most consumers go to Regis to get their hair cut or styled, whereas the opposite is true at Ulta -- the majority of consumers shop at Ulta for their selection of beauty products rather than going to Ulta's salon. Furthermore, Ulta continues to expand its product listings, giving consumers even more of a reason to shop within its stores. Over the last four years, Ulta has added over 65 brands such as Coach, The Body Shop, and The Art of Shaving to its shelves. With all of its success, it's easy to see why investors continue to pay a premium for shares of Ulta, but just how far can the company go?

The future of Ulta Salon, Cosmetics, & Fragrance
As accomplished as the management of Ulta is, led by CEO Mary Dillon, the one thing any good investor should be wondering is what the future looks like for Ulta. To start, the company believes that the United States can handle approximately 1,200 Ulta retail stores long term. This happens to be double the current 696 stores the company operates as of May 3, 2014. According to an investor presentation put together by the company, Ulta executives also believe they have much room to grow comparable-store sales as well. Ulta competes in two primary markets: the beauty products market and salons. The beauty products market is estimated at $65 billion, where Ulta competes with Sephora, Target, Wal-Mart, and numerous other retailers, while Salon services is estimated at $48 billion. All in all, Ulta's management estimates that their company has just a 2% market share of a total $113 billion potential market. Needless to say, Ulta has a long road ahead of it.

Foolish takeaway
Ulta currently trades for a lofty valuation of over 25 times this year's expected earnings. Despite this current price to earnings ratio, the company appears to not only have a lot of room to grow in the future, but the capability to make its potential a reality. The company's "one-stop shopping" experience, which happens to include a fully equipped hair salon, has and will almost certainly continue to draw in more and more customers. The growth potential of Ulta makes it worthy of a closer look by Foolish investors. 

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