Ulta Beauty (ULTA 1.31%) is trading far below its five-year average P/E ratio of 34 times. In fact, the stock is currently sitting near its 52-week low after ULTA missed analyst earnings expectations and cut its full-year earnings guidance on its second-quarter earnings report in late August.
Management cited "headwinds in the U.S. cosmetics market" leading to weaker sales in the makeup category, which accounts for nearly half of the company's top line But despite these headwinds, I see the current weakness as an opportunity to buy into a great company.
Strong execution continues
The largest U.S. beauty retailer continues to execute well compared to the overall market. L'Oreal North American revenue was flat in the first six months of 2019. LVMH's division that includes Sephora reported a sales increase of 8% for the same period, while Ulta's net sales increased over 12% in the first half of its fiscal 2019.
While the cosmetics segment has seen a slowdown, skincare and haircare sales continue to perform well. Skincare was very strong with some product categories delivering double digit comps growth in the latest quarter, driven by strong innovation and new products.
Management is also forging ahead with other major efforts. On the brick-and-mortar side of the business, Ulta plans to open 80 new stores in fiscal 2019. Online, management expects e-commerce to grow 20% to 30% for the year as well. The recent introduction of "buy online pickup in store" elicited a guest response that "exceeded expectations," according to management.
And the Ultamate Rewards loyalty program now boasts 33.2 million active members, up 13% over the year-ago period. This large base of members accounts for more than 95% of the company's sales, and the loyalty program offers the company significant insights into customer preferences that lead to improved personalization and stronger sales.
Major brand launches will build momentum
During the latest earnings call, CEO Mary Dillon noted the importance of new products and innovation, "Newness drove about 20% of our total comp this quarter, driven primarily by new items in skincare and cosmetics." As it turns out, the company recently launched The Ordinary, a skincare collection focused on results-driven products at an affordable price point for broad consumer appeal. Cult favorite luxury skincare brand Sunday Riley also debuted at Ulta this past summer.
Looking ahead, high-profile, buzzy brand launches should continue to drive sales growth and traffic at Ulta stores. For example, Kylie Skin will launch exclusively in fall 2019 at Ulta, an extension of the very popular Kylie Cosmetics. Also this fall, Ulta will launch KKW Beauty by Kim Kardashian West. KKW Beauty is only available on KKW.com at the moment, but customers will be able to test and sample KKW products in person at Ulta stores. The company similarly unveiled a makeup collection by Millie Bobbie Brown, the popular star of Netflix's Stranger Things.
Long-term trends are encouraging
While makeup is going through a tough cycle in the near-term, long-term cosmetics sales growth will be buoyed by major demographic trends. Ulta management sees millennials, Latina women, and Gen-Zers driving future demand.
Millenials’ spending on cosmetics is expected to increase as they move up the professional ladder, according to Coresight Research, and a Piper Jaffray survey reports that 90% of American teenagers prefer to buy cosmetics in stores. Meanwhile, Mintel reports that Latin-Americans are more likely to create complex makeup looks than the overall U.S. consumer.
A buying opportunity
Trading at just 19 times forwarding earnings, Ulta shares look very appealing. Management remains focused on key initiatives like store expansion, e-commerce growth, and hot new products in the face of the slowdown in the cosmetics space.
And further supporting Ulta’s future earnings growth is the company's share buyback program, which saw 1.14 million shares repurchased in the first half of fiscal 2019 for $388 million. As of Aug. 2019, over $500 million remains available under the current buyback program.
For investors looking for a long-term play on increased consumer spending on personal care and cosmetics, Ulta shares look quite pretty.