Ulta Salon, Cosmetics & Fragrance (ULTA -1.15%) has delivered wonderful returns to shareholders over a long-term holding period. In the past five years, its stock has risen from around $23 to nearly $160 per share. This amounts to a nearly 600% return, which is the kind of gain that can make up for a lot of underperforming stocks in one's portfolio.
Even with this meteoric run-up, Ulta remains a good stock to keep an eye on for investing new money. It's a much stronger business than it was five years ago, and still has market-beating potential going forward.
Plenty of room for growth
The last five years of explosive growth have taken Ulta's market cap to just more than $10 billion. Yet while this is a large number in absolute terms, it still leaves open the possibility for the company to double or triple its size without engulfing the entire market.
No dividends... yet
Ulta remains deeply in growth mode with its focus on expanding its retail footprint and juicing online sales. In the last quarter, it opened 24 new retail locations, which brought its total store count to 797. In 2015, the company plans to add 100 net new stores. These new store additions added 14% more retail space in fiscal year 2014, and should add 13% more in fiscal year 2015.
In a recent update to its fiscal year 2015 guidance, the company plans to "grow e-commerce sales in the 40% range." Ulta already operates in 48 states, and has a flourishing online business. New store creation and expansion of e-commerce are what it should focus on as long as the opportunities remain abundant.
At some point, Ulta will saturate the market for its type of consumer experience, which will hopefully be many years in the future. When that happens, the cash that is no longer being used for online expansion and new store construction can be put toward dividends or opportunistic share repurchases. I fully expect Ulta to eventually become a prodigious dividend payer, which can help to juice individual shareholder returns without the overall market cap of the company rising.
Consistent financial growth
Ulta has been remarkably consistent in improving nearly all of its financial metrics during the past decade or so. Top-line growth has been consistent, operating margins have improved from 5.1% of revenue in 2006 to 8.2% in 2011 and to 12.9% over the past 12 months. Free cash flow, which will eventually be used to pay those dividends, has gone from negative in 2009 to positive every year since, and reached its highest point in fiscal 2015.
Management is spending less as a percentage of revenue on the products that it sells, doing it with less overheard, and holding its effective tax rate relatively stable. This explains net margin soaring from 0.53% in 2006 to 4.88% in 2011, to 8.07% over the past 12 months. Net margin expansion like that, coupled with consistent revenue growth, is how a company experiences share-price appreciation like we've seen from Ulta. Given this track record, I believe the financials of the company will continue to improve.
Valuation remains fair
Often, a stock that has experienced a large gain in share price during a short period of time will not be a good investment going forward. If the share-price appreciation is because of an expansion in its multiple, i.e going from a P/E of 15 to a P/E of 90, and not because of an expansion in its earnings, it will be nearly impossible for the stock to continue on its upward path. Ulta looks poised to continue to be a good investment because its valuation, when compared to its five-year averages, looks fair.
Its P/E, P/B, P/S, and P/CF are all within spitting distance of Ulta's five-year averages for these valuation metrics. While a forward P/E ratio of 34 might seem steep when compared to 18 for the S&P 500, it's in line with Ulta's historic numbers. Great growth companies don't come cheap, and this is one of them.
Don't be scared of past performance
For nearly every great equity investment in history, there was a time -- often many times -- after the "big money" was made that investors felt like they missed out. Just because they missed the run from $10 to $50 per share, many investors choose to sit out altogether. This is often a mistake.
Great companies tend to continue to be great companies, and if that hypothetical stock is $1,000 per share in 15 years, it matters less whether you got in at $25 or $50 -- just that you got in at all. Ulta is a wonderful company that I think has many more market-beating years ahead of it. Take a look for yourself, and see what you think.