I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: Ulta Salon (Nasdaq: ULTA). Is this beauty retailer the real thing? Let's get right to the numbers.

Foolish facts


Ulta Salon

CAPS stars (5 max) **
Total ratings 138
Percent bulls 84.1%
Percent bears 15.9%
Bullish pitches 17 out of 18
Highest rated peers Footstar, Midas, PetSmart

Data current as of Oct. 26.

Judging by its two-star rating, Fools have mostly missed this year's 78% rally in Ulta Salon, culminating in a 52-week high of $32.50 two weeks ago. But some are beginning to wake up to this growth story.

"This is the kind of retail stock you like -- with only 345+ stores in 38 states, and targeting an eventual spread of 3,000 stores, we have a potential 10-bagger or more here. Purchased [one-half] position on start date, added another quarter on Sep 13th. Stock is breaking out very hard," wrote Foolish investor Manutius last month.

Whether you believe Ulta can get to 3,000 stores, the company's overall store count more than doubled between 2005 and 2009. Management clearly sees growth as a priority.

They also appear to believe in their targets. Within a week of Manutius' pitch, Ulta board member Dennis Eck bought 94,800 shares on the open market at an average price of $28.15 each. The stock has rallied some since, but I doubt he'd spend that much for just incremental gains.

The elements of growth


Last 12 Months



Normalized net income growth 99.1% 55.7% 0.4%
Revenue growth 16.1% 12.7% 18.9%
Gross margin 32% 30.5% 30.2%
Receivables growth (13.1%) (26.2%) (11.5%)
Shares outstanding 58.9 million 58.2 million 57.7 million

Source: Capital IQ, a division of Standard & Poor's.

More likely is he's betting on the promise of a long-term growth story. The data in this table support that thesis. Let's review:

  • While revenue hasn't accelerated perfectly, normalized net income has soared. Adding locations seems to be working.
  • More importantly, gross margin is on the rise. Ulta's pricing power is at least partly responsible for net income growing so much faster than revenue.
  • Management has also proven adept at keeping receivables in check, allowing cash to flow through to the balance sheet. Ulta had $15.9 million in cash and investments as of July 31, Capital IQ reports.

Competitor and peer checkup


Normalized Net Income Growth (3 yrs.)

J.C. Penney Co. (NYSE: JCP) (36.7%)
Macy's (NYSE: M) (15.2%)
Nordstrom (NYSE: JWN) (9.9%)
Regis (NYSE: RGS) (5%)
Ulta Salon 35.4%

Source: Capital IQ, a division of Standard & Poor's. Data current as of Oct. 26.

Not only are larger peers and competitors unable to touch its earnings growth rate, but Ulta's annual return on capital has also doubled from 9.1% for fiscal 2009 to 18.1% over the trailing 12 months ended in July. Growth like that doesn't come around often.

Grade: sustainable
On balance, Wall Street expects Ulta to keep growing by 23% a year. I'm expecting that and more, given the company's history of profitable expansion and recent insider buying. As such, I've rated the stock to outperform in my CAPS portfolio.

Now it's your turn to weigh in. Do you like Ulta Salon at these levels? Let us know what you think using the comments box below. You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

Interested in more info on Ulta Salon? Add it to your watchlist by clicking here.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool owns shares of Wal-Mart and is also on Twitter as @TheMotleyFool. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Its disclosure policy thinks Monty Python is sustainably funny.