- Ulta, the other company I was thinking of cutting, has a surprisingly favorable relative valuation in the beauty retail space. It has decent margins and actually is able to direct decent amounts of buybacks. Beauty products in particular make a lot of sense to be sold alongside salon services in a storefront so you can actually suss out the high-end products in person. They have numerous private label brands and partnerships that attract customers, providing a small buffer to their expanding loyalty program. They are at their lowest ever P/E ratio right now at only 13, but with a high P/S and book ratio of 7, which is odd to me. They have a strong Return on Capital Employed (ROCE) and are free from debt. However, being a pure-play storefront with little room to grow aside from the untested waters of abroad leaves this company with a likely case of declining margins and earnings before only being able to grow modestly in the future. It is certainly a giant that can grow bigger, but the execution risk amid growing competition from e-commerce and other legacy storefronts in the US may take away their market share in areas that are already saturated with stores. Perceived undervaluation is mostly tangible under assumed multiple expansion, which doesn’t leave a whole lot of room for an edge. Morningstar has the following to say: “We believe it carries more products and brands in the major beauty categories of makeup, hair care, skin care, fragrance, bath, and accessories than any other US specialty beauty retailer. According to the National Retail Federation, Ulta and wide-moat LVMH’s Sephora are the only two specialty beauty retailers among America’s 100 largest retail companies. Although Ulta faces significant and increasing competition, we believe it has a unique market position and loyal customers. As evidence of its competitive edge, its adjusted return on invested capital, including goodwill, has consistently been above our 9% estimated weighted average cost of capital. We estimate Ulta's adjusted ROIC, including goodwill ROIC, will average 27% over the next decade… We view Ulta's ability to thrive in a very crowded marketplace as evidence of a competitive edge…We view Ulta's strong margins as evidence of its competitive edge…We think Ulta's salon services with 8,000 stylists provide a competitive advantage. The $60 billion (IBISWorld estimate) US hair salon industry is very fragmented, as national chains (such as those franchised by Regis) have less than 10% share…We believe Ulta has opportunities for store growth despite its large base. The chain has expanded rapidly, having added about 1,000 locations since the end of 2008. As Ulta now has stores in all 50 states and all major metropolitan areas, we believe its store openings will slow. Unlike some competitors (including Sephora), Ulta has no stores outside the US. The firm had planned to enter Canada in 2021, but this expansion was put on indefinite hold. Instead, Ulta's first international expansion will be into Mexico through a partnership with Grupo Axo… Due to the ease of launching products online and marketing them through platforms like Instagram, it has never been easier to launch new beauty products. Many of them fail, but some of them have found success. Ulta has been proactive in seeking new brands and offering them in its stores…We estimate Ulta will achieve 4% compound average sales growth over the next 10 years, well below its 16% average annual sales growth over the past decade. We forecast 4% yearly same-store sales growth in the long term.”
How well do narratives help inform your perspective?
Disclaimer
The user n385903 holds no position in NasdaqGS:ULTA. Simply Wall St has no position in any of the companies mentioned. The author of this narrative is not affiliated with, nor authorised by Simply Wall St as a sub-authorised representative. This narrative is general in nature and explores scenarios and estimates created by the author. The narrative does not reflect the opinions of Simply Wall St, and the views expressed are the opinion of the author alone, acting on their own behalf. These scenarios are not indicative of the company's future performance and are exploratory in the ideas they cover. The fair value estimates are estimations only, and does not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that the author's analysis may not factor in the latest price-sensitive company announcements or qualitative material.
Read more narratives
WA
Consensus Narrative from 25 Analysts
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.
View narrativeUS$455.76
FV
22.8% undervalued intrinsic discount3.89%
Revenue growth p.a.
0users have liked this narrative
0users have commented on this narrative
18users have followed this narrative
about 1 month ago author updated this narrative