Up nearly 1,200% since its initial public offering in 2007, Ulta Beauty (ULTA -0.40%) has quadrupled the total returns of the S&P 500 Index over that time. Powered by its sales rising by more than 13 times since 2007, Ulta quickly became the largest specialty beauty retailer in the United States.
However, after posting incredible sales and earnings-per-share (EPS) growth in 2021 as the company rebounded from the pandemic, Ulta's growth decelerated in the last few quarters, causing its share price to drop 32% from its 52-week highs.
While this significant drop in share price over a few months is worrisome, I believe this overreaction may present an opportunity for investors focused on holding for decades. Here's what makes Ulta Beauty a magnificent S&P 500 stock to buy hand over fist right now.
Why it is way too early to give up on Ulta
With more than 1,350 stores and 420 shop-in-shop locations at select Target stores, the company commands a 9% share of the $104 billion U.S. beauty market -- making it the largest operator in its retailing niche. In addition to this leadership position, three critical attributes of Ulta's operations make it perfect for buy-and-hold investors.
- Recession-proof sales: For the most part, Ulta's focus on cosmetics, haircare, skincare, and fragrances has proven largely recession-proof (outside of the initial pandemic lockdown). Better yet, the beauty industry may actually thrive in more challenging times thanks to a phenomenon known as "the lipstick effect." As consumer spending tightens, customers opt for more minor indulgences (lipstick versus a handbag or car) to get an emotional pick-me-up.
- Ultamate Rewards members: Best yet for investors (and my favorite reason for owning Ulta) is the company's steadily growing 41.7 million Ultamate Rewards members. This massive base of members accounts for an incredible 95% of the company's sales and provides Ulta with a treasure trove of data for the company to learn from with each incremental purchase.
- Beloved by Gen Z: Comparably currently ranks Ulta the 19th-strongest brand for Gen Z shoppers, placing it ahead of some heavy hitters, such as Disney, Starbucks, and TikTok. Furthermore, a Piper Sandler survey of Gen Z consumers showed that 32% of respondents viewed Ulta as their beauty shopping destination, trailing only Sephora's (the company's quasi-duopolistic peer) mark of 37%. Maintaining this large mind share among the globe's youngest shopping demographic, Ulta is well positioned to grow within its industry or, at worst, maintain its share.
Although Ulta's store count growth decelerated to a paltry three net new stores in its most recent quarter, over the last few years, its management has dropped numerous hints of a possible international expansion. Though this brings an added layer of risk, this development should be watched closely by investors as it could quickly become the fourth critical attribute that makes the company a magnificent buy for the long haul.
Ulta's outsize profitability pairs perfectly with its share buybacks
While Ulta's net profit margin dipped ever so slightly to 11.8% in 2023 due to switching to a new enterprise resource system and opening a new distribution center, its profitability metrics have been nothing short of outstanding.
ULTA Return on Invested Capital data by YCharts.
Even amid the height of the pandemic, the company maintained a positive net profit margin on a trailing-12-month basis. Furthermore, Ulta's return on invested capital (ROIC) of 65% ranks as the fourth-highest figure in the S&P 500 Index. This is important to investors as stocks with high ROICs have proven to easily outperform their peers since they generate higher levels of profitability compared to their debt and equity.
Thanks to this immense profitability, Ulta can return a ton of its net income to shareholders through share repurchases. And by a ton, I mean almost all of it.
ULTA Net Income (TTM) data by YCharts. TTM = trailing 12 months.
Powered by this insatiable appetite for its own shares, the company has lowered its share count by 23% in the last decade -- juicing its EPS figures nicely over time.
Despite these impressive financials and Ulta's promising attributes, it means nothing if the company's valuation is too lofty. However, it looks like investors are in luck.
Why Ulta looks enticing right now
With a price-to-earnings (P/E) ratio of just 15, Ulta is the cheapest it has ever been outside of a few months during the onset of the pandemic.
ULTA PE Ratio data by YCharts. PE Ratio = price-to-earnings ratio.
While this discount is exciting enough in its own right, it serves another valuable purpose in making the company's buybacks all the more powerful. Scooping up shares at a discount, management can boost their returns on these buybacks -- making their goal to repurchase $900 million in stock throughout 2023 all the more beneficial. Equaling just under 5% of Ulta's $19 billion market capitalization, look for these buybacks to lift EPS higher over the next year.
Thanks to this confluence of factors -- Ulta's discounted valuation, tremendous profitability metrics, and promising attributes for long-term survival -- I can't help but consider the business a magnificent buy at 52-week lows today.
