Tatcha, XO KHLOÉ, And GLAMlab 20 Will Drive Future Growth In Beauty Retail

Key Takeaways

• Strategic brand expansion and loyalty program enhancements are key to driving future revenue and customer retention.
  
• Digital initiatives and operational improvements aim to boost engagement, conversion rates, and profitability.
  
• Intense competition in prestige beauty, economic concerns, and heavy promotions could pressure Ulta's market share, revenue, and profit margins.

Catalysts

Operates as a specialty beauty retailer in the United States.

• Ulta Beauty is driving growth through a strategic expansion of its brand portfolio, including exclusive offerings and new product launches such as Tatcha and XO KHLOÉ for the fourth quarter. This should enhance future revenue growth.
  
• The company is expanding its loyalty program with a 5% increase in active members, reactivation of lapsed members, and personalized incentives, leading to improved customer retention and potential long-term revenue growth.
  
• Ulta's digital initiatives, including enhanced app engagement, new digital experiences like GLAMlab 2.0, and UB Community, aim to increase member engagement and online conversion rates, which can positively affect earnings.
  
• The company is leveraging its strategic asset, UB Media, for retail media network growth, expected to offset some merchandise margin pressures and contribute positively to gross margins over time.
  
• Operational improvements, such as optimized promotional strategies, inventory management, and reduced shrink, are helping to maintain competitive positioning and profitability, positively impacting net margins.

Ulta Beauty Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ulta Beauty's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.6% today to 9.2% in 3 years time.
• Analysts expect earnings to remain at the same level they are now, that being $1.2 billion (with an earnings per share of $27.96). The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.8x on those 2027 earnings, up from 16.3x today. This future PE is greater than the current PE for the US Specialty Retail industry at 16.4x.
• Analysts expect the number of shares outstanding to decline by 3.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.97%, as per the Simply Wall St company report.

Ulta Beauty Future Earnings Per Share Growth

Risks

• Elevated competition, particularly in the prestige beauty sector, may continue to exert pressure on Ulta Beauty's market share and sales, potentially impacting revenue and profit margins.
  
• The dynamic and competitive consumer environment, coupled with economic concerns driving a focus on value, could dampen consumer spending in beauty, affecting revenue growth.
  
• A slowdown in key product categories such as mass makeup can drag overall sales performance, thereby impacting total revenue and earnings.
  
• Significant promotional activities, especially in a highly competitive market, could potentially lead to margin compression and affect profitability.
  
• The pressures from a high number of competitive openings in prestige beauty could sustain uncertainties impacting Ulta's ability to regain market share, revenue, and earnings growth in the near term.

Valuation

• The analysts have a consensus price target of $438.12 for Ulta Beauty based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $510.0, and the most bearish reporting a price target of just $330.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $12.7 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 18.8x, assuming you use a discount rate of 7.0%.
• Given the current share price of $423.57, the analyst's price target of $438.12 is 3.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.