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Ulta Beauty, Inc.
Last Updated: 21 Aug 2024
NASDAQ: ULTA
GICS Sector: Consumer Cyclical
Sub-industry: Specialty Retail
Management
CEO: Dave Kimbell
Tenure: 3.2 years
David C. Kimbell, CEO of Ulta Beauty since June 2021, has significantly influenced the company's growth and innovation. Under his leadership, Ulta Beauty has enhanced its digital capabilities by expanding same-day delivery options and introducing virtual try-on tools, catering to the evolving needs of its customers. Kimbell has also driven the company to gain market share in mass beauty, prestige skincare, and prestige fragrance, solidifying Ulta Beauty's position as a leader in the beauty industry.
In addition to his focus on customer experience, Kimbell has prioritized sustainability. He successfully established emission reduction goals, which received approval from the Science Based Target Initiative, reflecting Ulta Beauty's commitment to environmental responsibility. Kimbell also oversaw key transformational projects, including retrofitting distribution centers and transitioning to a new ERP platform, ensuring the company’s infrastructure is poised for future growth.
Before becoming CEO, Kimbell held various leadership roles at Ulta Beauty, including President, Chief Merchandising and Marketing Officer, and Chief Marketing Officer, where he honed his expertise in consumer insights, brand positioning, and social media strategy. His extensive experience in marketing and leadership, including previous roles at U.S. Cellular, Seventh Generation, and PepsiCo, has been instrumental in his success at Ulta Beauty.
Kimbell's achievements extend beyond the business world; he actively serves on several boards, including Big Brothers Big Sisters of Metropolitan Chicago and Chicago Lights, contributing to his community and the broader business environment.
Let us now analyze the CEO’s compensation.
The total compensation refers to the sum of all forms of payments and benefits received by the CEO per year. This can include salary, bonus, stock options, and other perks.
From the graph above, the CEO’s compensation has been consistent with the company performance over the past year. This can generally be a positive indication.
When a CEO's pay reflects the company's success, it suggests their interests are aligned with shareholders'. If the company thrives, the CEO benefits too. This incentivizes the CEO to make decisions that boost the company's long-term value.
Looking broadly at Ulta Beauty, Inc.’s management team, it has an average tenure of 2.3 years. It is considered experienced.
Business Overview
Ulta Beauty, Inc., is a leading specialty beauty retailer in the United States that provides a unique assortment of approximately 25,000 products from around 600 established and emerging beauty brands, spanning various categories and price points.
It offers a diverse portfolio across six main categories: cosmetics, skincare, haircare products and styling tools, fragrance and bath, services, and accessories. This includes revenue from private labels, cobranded credit card programs, royalties from its partnership with Target, and loyalty program-related income.
The company operates more than 1,350 stores strategically located in high-traffic areas, each designed with a bright, open layout to encourage product discovery and provide flexibility in response to consumer trends. In nearly every store, Ulta Beauty offers beauty services, including full-service hair salons and Benefit™ Brow Bars. Through its partnership with Target Corporation, Ulta Beauty has established over 500 shop-in-shops within Target locations, offering a curated selection of prestige beauty products.
Ulta Beauty's digital platforms, including its website and mobile applications, are designed to offer guests convenient, personalized shopping experiences. These platforms feature innovative tools like virtual try-ons and skin analysis tools powered by augmented reality and artificial intelligence. The company's diverse fulfillment options, including in-store and curbside pickup, ship-from-store, and same-day delivery, further enhance customer convenience.
The Ulta Beauty Rewards loyalty program, which drives over 95% of total sales, is a testament to the company's deep understanding of customer preferences. This program allows members to earn and redeem points for discounts on products and services. Ulta Beauty personalizes experiences, recommendations, and promotions through its Customer Relationship Management (CRM) platform, supporting the growth of its brand partners and ensuring that customers feel valued and understood.
The company targets beauty enthusiasts, representing approximately 65% of shoppers and accounting for over 80% of beauty product and service spending in the U.S.
Market, Strategy, and Competition Overview
Market
Ulta Beauty operates within the expansive, growing U.S. beauty products and salon services industry. According to Euromonitor International and IBIS World Inc. forecasts, this market generated approximately $181 billion in sales during 2023. The beauty products sector alone totaled roughly $112 billion in 2023, encompassing cosmetics, haircare, fragrance, bath and body, skincare, styling tools, and toiletries.
Ulta Beauty claims only a 9% share of this $112 billion beauty product market. Within this sector, the company competes across all major categories and price points, offering prestige, mass, and salon products.
The salon services industry, including hair, skin, and nail services, contributed approximately $69 billion in 2023. Ulta Beauty holds less than 1% of this industry.
Strategy
Ulta Beauty targets beauty enthusiasts across various demographics and shopping behaviors, recognizing their deep emotional connection with beauty. Despite economic challenges and the disruption caused by the COVID-19 pandemic, these consumers remain committed to in-person shopping while embracing online channels for convenience and discovery.
To maintain its leadership position amid rising competitive pressures, Ulta Beauty refreshed its strategic framework in 2021, focusing on six key pillars to drive long-term growth.
Ulta Beauty aims to engage beauty enthusiasts with a curated, inclusive assortment that reflects current beauty and self-care trends. The company is focused on maximizing growth in core categories like makeup, skincare, haircare, and fragrance while also promoting cross-category platforms such as Conscious Beauty, Black-owned brands, and the Wellness Shop. Exclusive products and efficient assortment management further differentiate Ulta's offerings.
The company is evolving its omnichannel experience by connecting physical and digital ecosystems, aiming to deliver a seamless shopping journey. By expanding its store footprint, enhancing service offerings, and investing in digital innovation, Ulta Beauty seeks to create a cohesive experience that engages guests across all channels.
Ulta Beauty leverages robust consumer research and insights from its 43.3 million loyalty program members to deepen its presence in the beauty community. This data-driven approach helps the company personalize experiences, drive conversion, and increase guest engagement through initiatives like a refreshed loyalty program and a creator and content ecosystem.
Operational excellence is a priority for Ulta Beauty as the company navigates cost pressures and market shifts. By optimizing its cost structure, upgrading its resource planning platform, and enhancing its supply chain, Ulta Beauty aims to achieve profitable growth and maintain a competitive edge in the evolving retail landscape.
Ulta Beauty also cultivates a world-class culture and talent, fostering a values-based, high-performance environment. The company is committed to attracting and retaining top talent, ensuring that every associate has the opportunity to grow and contribute.
Finally, Ulta Beauty is dedicated to expanding its environmental and social impact. Through initiatives like the Conscious Beauty platform and efforts to minimize the company’s environmental footprint, Ulta Beauty strives to drive sustainable change and positively impact both its associates and the world.
Competition
Ulta Beauty faces rivals in prestige and mass products from traditional department stores, specialty stores, grocery stores, drug stores, mass merchandisers, and the online platforms of national retailers and brands.
The company also competes with pure-play e-commerce businesses and online marketplaces. The salon services and products market is highly fragmented, with competitors ranging from chain salons to independent operators.
Ulta Beauty, Inc. Economic Moat
There are many ways to identify Ulta Beauty, Inc.’s economic moat, but I focus on these five sources. The rating is purely subjective and is based on my in-depth understanding of the company.
Economic Moat: Narrow
Ulta Beauty primarily establishes its economic moat through solid brand recognition, a diverse product assortment, and strategic partnerships. As a leading specialty beauty retailer, Ulta’s identity as a one-stop shop for beauty products and services has garnered significant brand loyalty. The company’s ability to curate a wide range of products, from mass-market to prestigious brands, enhances its customer value proposition.
Strategic partnerships with top beauty brands, such as Chanel and MAC, have significantly enhanced Ulta's brand value. As department stores declined, these brands sought new homes, and Ulta emerged as the preferred partner. The retailer's aggressive expansion of its prestige product offering, store remodels, and staff training positions it as the premier destination for high-end beauty products.
The success of Ulta’s economic moat is also driven by its Ultamate Rewards loyalty program, which boasts over 43 million members. This program contributes to the company’s revenue, with members generating over 95% of sales. The loyalty program and branded credit cards foster repeat visits and strengthen customer loyalty by offering valuable incentives and collecting crucial customer data.
Although not substantial enough, the Ultamate Rewards program creates a switching cost for customers, as accumulated points and rewards are not transferable to other retailers. Customers are incentivized to continue shopping at Ulta to maximize their benefits, making them less likely to switch to competitors.
Ulta’s salon services, supported by 8,000 stylists, also play a pivotal role in attracting and retaining loyal customers who frequent the stores more often and spend more per visit. While salons contribute a smaller portion of overall revenue, they enhance the brand’s value and differentiate Ulta from other beauty retailers.
Furthermore, Ulta benefits from economies of scale as the largest specialty beauty retailer in the U.S., operating over 1,300 stores nationwide. This scale allows for cost advantages in purchasing, distribution, and marketing.
The company's saturation in many regions creates a significant barrier to entry for new competitors. At the same time, its unique integration of salon services differentiates it from pure-play beauty retailers, further strengthening its competitive advantage.
Ulta Beauty, Inc. Performance
My quick performance checklist:
Has Ulta Beauty, Inc.'s revenue consistently grown year over year for the past five years? Its revenue dipped in the fiscal year 2021 but rebounded back the following year.
Is the net income consistently increasing year over year for the past five years? Likewise, it dipped in fiscal year 2021 but rebounded the following year.
Has the cash flow from operating activities shown consistent year-over-year growth for the past five years? No, it is inconsistent.
Has the free cash flow remained positive for the past five years? Yes.
Is the gross margin % consistent or growing over the past five years? It dipped in the fiscal year 2021 but rebounded to an average of 39%.
Has the EPS shown growth over the past five years? Similarly, it dipped in the fiscal year 2021 before showing growth momentum.
Ulta Beauty's net sales surged 9.8% to $11.2 billion in fiscal 2023, driven by increased comparable sales, new store openings, and other revenue. While gross profit climbed 8.3% to $4.4 billion, the gross profit margin contracted due to higher promotional activity, inventory shrink, and category mix shifts, partially offset by increased other revenue and lower store costs.
Has free cash flow per share increased over the last five years? Yes.
Management Effectiveness
Has Ulta Beauty, Inc.'s ROE stayed within or above the 12%-15% range year over year for the past five years? Yes, except for the fiscal year 2021, when it decreased below 10%.
A company having a ROE higher than the industry average is generally considered positive. It can be a sign of strong management that the company is making good use of company resources to create better returns as compared to its competitors.
Has the ROIC stayed within or above the 12%-15% range year over year for the past five years? Yes, except for the fiscal year 2021, when it decreased below 10%.
When a company's ROIC is greater than its WACC, it signifies that the company is generating returns on its investments that are higher than the cost of financing those investments. In simpler terms, the company is making more money on its projects than it costs to fund them. This indicates efficient capital allocation and value creation for shareholders.
The trendline for the number of shares outstanding is declining, which is something that an investor would be pleased to see.
The company repurchased 352,005 shares under its previously announced share buyback program in the fourteen weeks ending 3 Feb 2024. Authorized by the board in Mar 2022, this program allows for the repurchase of up to $2 billion of the company's common stock. As of 3 Feb 2024, approximately $99.9 million remained available for share repurchases under this program.
Ulta Beauty, Inc. Financial Health
Current Ratio: 1.8 (pass my requirement of >1.0, but <3.0)
I use the current ratio instead of the quick ratio to analyze the company’s liquidity. This is because I want a general overview of financial health and the company’s inventory is a significant asset and easily be converted to cash.
The trend of its current ratio has been increasing over the past five years and is generally a good sign.
A rising current ratio suggests the company has a growing pool of current assets (cash, inventory, receivables) relative to its current liabilities (short-term debts). This signifies a greater ability to meet its short-term obligations without needing to sell long-term assets or raise additional funds.
It could indicate the company is effectively managing its debt by paying down existing liabilities or avoiding excessive borrowing. This strengthens its financial stability.
When compared to its industry, Ulta Beauty, Inc.'s current ratio is better, as it is above the industry median of 1.6.
Debt-to-EBITDA: 1.0 (pass my requirement of <3.0)
This ratio measures a company's ability to pay off its debt with its operating income. A higher ratio may indicate higher financial risk, while a lower ratio suggests more manageable debt levels relative to earnings.
I use the debt-to-EBITDA ratio instead of the net debt-to-EBITDA ratio because I want a straightforward view of the company's gross leverage, focusing on the total debt burden without accounting for cash reserves.
Debt-to-EBITDA can present a more conservative view of a company's financial risk by not considering cash. It is useful for me to understand the worst-case scenario regarding the company's ability to service its debt. Also, it helps that every company has different cash management strategies.
Ulta Beauty, Inc.’s debt-to-EBITDA ratio has decreased over the past five years. The decrease was due to higher EBITDA, which is usually a good sign.
A lower debt-to-EBITDA ratio suggests the company is generating enough cash (EBITDA) to comfortably cover its debt obligations. This indicates a stronger financial position and reduces the risk of default.
Ulta Beauty, Inc.'s debt-to-EBITDA ratio is better than its industry average of 2.6, which is below the industry median.
Interest Coverage: N/A (pass my requirement of >3.0)
Debt Servicing Ratio: N/A (pass my requirement of <30.0%)
Ulta Beauty, Inc. Stock Performance
The graph below compares the cumulative total stockholder return on Ulta Beauty’s common stock with the S&P 500 and the S&P 500 Consumer Discretionary (Industry Group, SP500-2550) for 2 Feb 2019 through 3 Feb 2024.
The graph assumes an investment of $100 made at the closing of trading on 2 Feb 2019 in (i) Ulta Beauty’s common stock, (ii) the stocks comprising the S&P 500 and (iii) the stocks comprising the S&P 500 Consumer Discretionary (Industry Group, SP500-2550).
All values assume reinvestment of the full amount of all dividends, if any, into additional shares of the same class of equity securities at the frequency with which dividends are paid on such securities during the applicable time period.
Ulta Beauty, Inc. Intrinsic Valuation
Estimated intrinsic value: USD $320.11
Value is calculated using the discounted cash flow method (considering their cash and debt) and scenario planning.
Average free cash flow used: USD $990M
Projected growth rate: 7% - 8%
Beta: 1.2
Discount rate: 9.0%
Ideal margin of safety: 30% (Uncertainty: Mid)
Price range after the margin of safety: <USD $225.00
Date of calculation: 21 Aug 2024
I use the past five years' free cash flow and apply a weighted average, focusing more on the recent years. I then round the average to the nearest tens. In some instances, I use a more realistic number to represent the free cash flow.
The total debt and cash and short-term investments are the last quarter figures that are rounded to the nearest tens. In some instances, I use more realistic numbers to represent them.
Ulta Beauty, Inc. Relative Valuation
My Concerns
Ulta Beauty faces several risks that could impact its sales and overall business performance. The company's success hinges on recognising and adapting to beauty trends and shifting consumer preferences. This includes addressing concerns about product sustainability, ingredient transparency, and animal welfare.
Ulta must also translate market trends into saleable products and services ahead of its competitors, maintain strong vendor relationships to access the latest merchandise, and ensure efficient distribution to keep stores well-stocked. Failing to meet consumer demands could lead to decreased sales.
Macroeconomic conditions also pose a significant threat to Ulta Beauty. Factors such as inflation, high interest rates, recessionary fears, labor cost pressures, and rising transportation and shipping costs have already impacted the company's financial performance and could continue to do so.
Ulta expects inflationary pressures to persist in 2024 and closely monitors these economic factors. Prolonged inflation or a recession could further harm the business, reducing consumer spending on discretionary items like beauty products and salon services. The economy's overall health is crucial to Ulta's operations, and economic instability can significantly reduce consumer purchases of non-essential items, leading to lower-than-expected sales.
A deteriorating economic environment could also harm Ulta's commercial partners, potentially disrupting its operations and financial stability.
The competitive landscape in the beauty products and salon services market is another challenge for Ulta Beauty. The market features many competitors, including department stores, specialty retailers, drug stores, mass merchandisers, high-end and discount salon chains, local beauty retailers, and online retailers. Many of these competitors are larger and have greater financial and marketing resources, allowing them to adapt quickly to market changes, invest more in marketing, achieve stronger brand recognition, and implement aggressive pricing strategies
Ulta Beauty is also vulnerable to changes in the US retail landscape, which accounts for all its revenue. Physical stores and shopping centers are seeing declining foot traffic due to online shopping and market saturation. Most Ulta stores are in suburban strip centers, some of which are facing similar declines. While Ulta's newer stores and upcoming lease expirations offer some flexibility, the evolving retail environment remains a challenge for the company.
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