Ulta Magnificence Inventory: enterprise with sustained development, however at full worth


Thesis article

The final magnificence (NASDAQ: ULTA) is the main magnificence chain operator in the USA, with 1,318 shops throughout the nation. Though the enterprise is maturing, Ulta nonetheless has a number of levers for the continual return of shareholders: the incremental development of the shops, on which earn a ROIC of 30%; leverage a strong model to drive comparable same-store (SSS) gross sales development; and share buybacks. These three pillars of earnings per share development are more likely to result in excessive single to double digit returns on equities within the coming years. I want barely greater annual return estimates and can begin shopping for if the inventory falls beneath $ 350.

Nicely-defined development technique

Brick and mortar retailers typically have two levers to extend income: construct new shops and enhance gross sales per retailer. Ulta has been very profitable in each, which has helped drive distinctive development.

Incremental retailer development

Over the previous three years, Ulta Magnificence has seen a mean development of latest shops of three.5% yearly, even managing to extend the variety of shops throughout the profound COVID-19 pandemic. Since constructing new shops requires a big use of capital, it’s helpful to delve into the financial system on the retailer stage.

Growth of the Ulta Beauty store

Progress of the brand new Ulta Magnificence retailer (Writer’s work)

In Ulta, on common, it prices $ 1.4 million to open a brand new retailer, and the NOPAT per retailer is roughly equal to $ 750,000 per yr (NOPAT / variety of shops). By adjusting to incremental capital investments in shops, investments to assist their provide chain and dealing capital, Extremely’s ROIC reaches simply over 30%. That is a particularly engaging inside funding profile and explains how Ulta has been in a position to enhance EPS to twenty% each year over the previous decade.

Ulta’s administration mentioned they imagine their market is not going to begin saturating till they attain 1,500 to 1,700 shops within the US (200 to 400 extra shops than in the present day). That leaves not less than one other 4 years of regular development earlier than Ulta should push into different markets for continued development.

Ulta additionally has a partnership with Goal (TGT), which permits them to open 800 mini-stores of 1,000 sq. ft every in Goal areas throughout the nation. The precise economics are unclear, however provided that Ulta at present collects ~ $ 650 per sq. foot of income, the mini-stores may add ~ $ 520 million in medium-term income to Ulta’s prime line.

Along with the Goal push, I imagine Ulta can conservatively enhance the variety of web shops by 50 per yr, equal to an annual funding of $ 70 million and incremental NOPAT of $ 37.5 million (development of three.8% in comparison with TTM numbers).

SSS development

The opposite key driver for development is comparable gross sales development in the identical retailer, an space that Ulta has weakened over the previous two years. SSS may be elevated in two methods: by rising the variety of transactions and by rising the amount of cash spent on every transaction (for instance, ticket development).

Over the previous 5 years, Ulta has seen extra ticket development than transactions, with the previous much more secure, as illustrated within the graph beneath.

Ulta Beauty Same-Store-Sales Growth

Progress of Ulta Magnificence SSS (Writer’s work)

Over the long run, SSS development will average properly beneath the five-year common of 8.8%, as administration famous that mature shops are inclined to solely obtain low single-digit SSS development. As enterprise matures, it’s possible that each one shops will finally have a tendency in the direction of these ranges.

Highly effective model worth, a aggressive benefit

Constructing aggressive benefit is the important thing to success and sustaining above-average returns on capital in any trade, and retail is not any exception. Specifically, Ulta has a model beloved by these of Technology Z, as highlighted in the latest semiannual survey Piper Sandler Technology Z.

In it, a powerful 48% of respondents ranked Ulta Magnificence as their prime magnificence vacation spot. This surpassed the variety of respondents who ranked rival Sephora, owned by LVMH (OTCPK: LVMHF), with a ratio of two.5 to 1.

Model loyalty was additionally demonstrated by Ulta’s loyalty card, which has over 37 million members and will increase ticket worth throughout all retail channels.

Having a era of shoppers who overwhelmingly want your model to the competitors bodes properly for Ulta’s long-term success and helps the concept Ulta will proceed to have the ability to drive market share and portfolio features respectively. from rivals and shoppers.

Massive Capital Return Program

In response to slowing development and big free money flows, Ulta has launched into an aggressive capital return program, returning $ 1.23 billion to shareholders by means of share buybacks, web of the difficulty, over the previous twelve months. This equates to a buyback yield of almost 6%. Since 2017 alone, Ulta has returned almost all free money stream to buyers by way of share buybacks, distributing $ 3.3 billion and decreasing shares excellent by 15.9%.

Repurchase of Ulta Beauty shares

Ulta Magnificence purchases ($ mm) (Writer’s work)

Though the tempo of inventory buybacks over the previous yr is unsustainable as the corporate generated $ 950 million in FCF within the TTM and plans to double its capital spending in 2022, $ 1.87 billion stays beneath present authorization. and administration led for $ 900 million in buybacks in 2022, equal to a buyback yield of 4.2%.

For my part, buyers ought to cheer on Ulta for making excessive ROIC investments of their enterprise, even when it means short-term returns on fairness are decrease.


I’ll consider Ulta in 3 ways: on a relative foundation with a number of comparisons with friends, on an absolute foundation by way of a DCF, and by way of an inverse DCF to see which assumptions are built-in into the present analysis.


Ulta would not have many public rivals, as they are typically boutiques or grouped into a bigger firm, equivalent to Sephora at LVMH. Their solely public competitor is Sally Magnificence Holdings (SBH), which has a much less engaging development profile and capital returns.

With this in thoughts, SBH trades at 5.3x earnings ahead, 17x EV / FCF and has a PEG ratio of 1.6. Ulta Magnificence trades at 20x, 21.5x, EV / FCF ahead earnings, a a number of that has fallen precipitously over the previous 5 years and sports activities a PEG ratio of two. This relative comparability makes me imagine that Ulta is at present near honest worth primarily based on a comparability with a presumably weaker peer.

ULTA vs SBH EV Free Cash Flow
YCharts information

Primarily based on my estimates, Ulta can comfortably dial the EPS at 11% each year not less than till 2025, primarily based on a easy and conservative formulation of SSS development + web retailer development + buyback development = EPS development. A PEG ratio of two would justify a P / E of 22x and suggest an annual share worth appreciation of simply over 11%.

Growth of the EPS of Ulta Beauty

Extremely Magnificence EPS bridge (Writer’s work)

Discounted money stream mannequin

For many who subscribe to the concept an organization is simply price as a lot as the current worth of its future free money flows, a DCF is a necessity when evaluating an organization.

In my mannequin, I arrive at an estimated annual free money stream development within the 8% vary, primarily based on an annual SSS development of three.5%, annual new retailer development of three.8%, and broad margins. in step with the goals set by administration on the event of the 2021 Analyst Day (i.e. 13-14% working margin). Discounting these money flows at 10%, I estimate that the current worth of Ulta’s future free money flows by means of 2026 is roughly $ 7.25 billion. I believe a terminal a number of of 18.5x is cheap for such a top quality enterprise and creates an inexpensive margin of security. Utilizing these outcomes, coupled with a web money place of $ 655 million, excluding leases, I provide you with an estimated web asset worth of $ 19.5 billion, or $ 370 per share. That is 10% beneath the present share worth of $ 405.

Given the standard of Ulta and their tendency to shock to the upside, I’m keen to start out shopping for shares within the beneath $ 350 vary primarily based on the DCF.

Reverse discounted money stream mannequin

Utilizing the identical low cost price and a number of terminal assumptions within the DCF, it seems the market is pricing in annual FCF development of seven.7% over the subsequent 5 years on a $ 950 million foundation. These assumptions appear right and counsel that there’s restricted upside within the present worth vary.

Ultra Beauty DCF reverse

Extremely Magnificence DCF reverse (Writer’s work)


There are three key dangers Ulta Magnificence faces: declining gross sales development in the identical retailer, the legislation of huge numbers, and a possible recession that might undermine its clients’ spending energy.

  • SSS development down: Pre-COVID, Ulta’s SSS development was spiraling downward because of a maturing retailer base. Happily, this threat is mitigated by administration’s dedication to reverse this pattern and drive the SSS’s annual development of 3-5% by means of 2024, although it stays to be seen whether or not they’ll succeed.
  • The legislation of huge numbers: Ulta is more likely to open about 50 shops a yr sooner or later, which on an rising foundation signifies that the annual share unit development should lower over time. A decrease share development might end in a decrease market a number of, with probably lowering future returns.
  • Recession: Excessive inflation and potential future job losses may put stress on shoppers’ spending energy. Nevertheless, in line with a 2020 white paper from McKinsey, the sweetness trade proved resilient throughout financial downturns, even increasing throughout the nice monetary disaster of 2008.

Take away

Ulta Magnificence is an extremely prime quality enterprise that achieves distinctive returns on capital and reinvests the proceeds at equally excessive charges of return. Nevertheless, there isn’t a nice inventory at any worth, and Ulta’s present share worth offers me a break from beginning inventory shopping for. I’ll possible begin shopping for if ULTA drops beneath $ 350 and construct a full place if it falls beneath $ 300.

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