At a time when many retailers are struggling with growth hangovers from the pandemic, Ulta Beauty (ULTA -0.94%) is moving in the opposite direction. The beauty products specialist recently boosted its 2022 revenue outlook to nearly $10 billion, in fact. And while profit margins are falling at retailers like Walmart, at Ulta, they're rising.
A deeper look into the business trends reveals a few more reasons to like this stock today. Let's take a look at a few of the most compelling ones.
Set up for success
The first half of 2022 has been a beautiful period for the business. Sales were up 16% at existing locations, and that's on top of a 61% spike in the prior-year period. Those gains have been balanced between higher customer traffic (up 9%) and rising average spending (up 6%).
These wins set Ulta Beauty apart from almost all national retail chains, which are as a group dealing with slowing demand due to sharp shifts in consumer spending preferences.
The beauty niche seems to be benefiting from these shifts, which are disproportionately benefiting the category leader. "Strong consumer demand and broad-based momentum across our business continued," CEO Dave Kimbell said in the company's second-quarter earnings press release in late August.
The chain is also enjoying soaring profits even as costs spike. While companies like Walmart, Target, and Lowe's are reporting steady or falling margins, Ulta Beauty isn't. Its operating profit ticked up to $391 million over the last six months, or 17% of sales, compared to $332 million, or 16.9% of sales in the prior-year period.
That success reflects the company's strong market position in an expanding niche. But it's also a function of its deep connection with shoppers, who love the in-store browsing experience and Ulta's convenient online platform. That connection shows up most clearly in metrics like customer traffic, which was up 8% last quarter even as the chain continued to raise prices.
These sales and profit wins might be a temporary consequence of short-term shifts in consumer demand. Walmart and Target are currently experiencing painful pullbacks in previously popular retail niches like home furnishings, after all, and Ulta Beauty might endure a similar slump in future quarters.
However, investors are unlikely to see it take big inventory write-downs or face slumping prices, partly because Ulta's inventory isn't as seasonal, and its products aren't bulky like outdoor furnishings. And even if its profit margins decline, earnings could keep rising.
The best news for investors is that Ulta Beauty's stock valuation is still attractive. The retail stock trades at roughly 2.4 times sales, much cheaper than the three times sales valuation it boasted as recently as mid-2021.
There are risks here, including the possibility that an economic slump will put pressure on sales, or that there will be a pullback in demand for beauty products following several years of soaring sales volumes. But the big picture still appears bright for the business, and for investors' long-term returns.
Ulta is winning market share online and in its stores, and is demonstrating value in its selling platform. If it can maintain its momentum, there's room for its sales to head much higher over time even after the company crosses the $10 billion annualized revenue mark -- which is likely to happen by late 2022.