October 15, 2020 - 12:43pm EST by
2020 2021
Price: 238.76 EPS 4.95 0
Shares Out. (in M): 56 P/E 48 0
Market Cap (in $M): 13,400 P/FCF 0 0
Net Debt (in $M): 0 EBIT 427 0
TEV ($): 15 TEV/EBIT 35 0

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Ulta Beauty (ULTA)

Ulta is a solid company operating in the beauty industry. The beauty industry is enduring and has an addictive nature to it with secular growth trends from increased use of products by younger generations and Latinx. Store growth is less certain, but their broad product offering and high customer integration should continue to make their brand relevant. Valuation is not that attractive at the current time (~1.05 P/IV), but ULTA’s stock has exhibited volatility in the past which if that continues going forward could provide an attractive entry point. 


·         Ulta Beauty opened their first store in 1990 and have grown to over 1,260 stores nationwide. They IPOed in late 2007.  

·         Market cap of $12.8 B, with broad analyst coverage.

·         The CEO has been in place since 2013, prior to which she was CEO of U.S. Cellular and Chief Marketing Officer at McDonalds. Management is primarily in their 50s.

·         Executive incentive compensation is based on a level of adjusted earnings before taxes (EBT) for short and long term incentive programs. Long term incentive makes up 51% of executive pay.

How do they make money?

·         Ulta is the largest beauty retailer in the United States. They offer more than 25,000 products from 500 beauty brands across all categories and price points in their 1,260 stores across the U.S. They have led the transition to a complete beauty destination, whereas in the past different price points and product types were sold through different channels.

·         Their stores are almost all U.S., but they have announced their intention to expand into Canada in 2019.

·         Surprisingly, only 3.5% of sales are driven by replenishment only. This suggests that many customers are experimenting and purchasing products that they have not purchased in the past 12 months.

·         They offer a private label brand “Ulta Beauty Collection” which makes up 6% of sales. Also, at times they will sign deals with brands to offer their products exclusively, either permanently or temporarily. These products accounted for 6.7% of sales in 2019.  

·         Their top 10 vendors account for 61% of their total sales. These vendors include companies such as Estee Lauder, L’Oreal, and Shiseido.

·         Stores are typically 10,000 sq ft with 950 of that dedicated to a full-service salon. They offer personalization services in-store, in which professional stylists customize hair, skin, brow, and make-up services for customers. Services make up only 5% of sales.

·         Ulta reports only one segment, which includes all retail stores, salon services, and E-commerce. However, they do provide a breakdown by product mix. Mix has not changed much over the past 3 years, though they have seen growth in cosmetics over a longer time frame.


Growth Plans

Management confirmed in September 2020 that the “fundamental strategic direction they saw for the business pre-COVID still remains”.

Ulta has grown their number of stores at 16% on average since 2005, but that number has slowed to an average of 10% in the last 5 years and 7% over the past year. The total number of stores is currently 1,250 and they believe the total opportunity for store growth is 1,500-1,700 stores in the U.S.The rationale for the store opportunity is driven by their only 7% market share in beauty and in-store still being the most relevant channel along with continued market research and analytics. For context, here are the number of competitors stores: Sephora has about 460 stand alone stores and 574 stores inside of JCPenny, Sally Beauty has 3,200 stores in North America, and Bath and Body Works has 1,700 stores. 

Historical store growth and same store sales growth have resulted in 10% or greater revenue growth in each of the past 15 years. Same store sales growth has primarily come from market share growth. Ulta has taken market share away from department stores and large general retailers. Their strategy of creating a one stop shop for beauty has consolidated price points and products into one store, which had previously been spread across channels. This opportunity could continue as mall-based competitors continue to  struggle.

Pre-COVID, I have been told that the store fleet had very few stores with negative comps. In mid 2019, management said that new stores had same store sales in mid single digits whereas mature stores were in the low single digit range. 

They have decreased their store opening rate further from an average of 100 over the past 5 years to about 30 this year and a forecast of 30 next year. In 2019, nearly all new stores were opened in existing markets rather than new markets.The reduction in store growth is due to general uncertainty and potential opportunities for real estate. They believe new opportunities will arise which were previously too expensive, while contract terms and costs overall will become more favorable. 

Ulta announced the closure of 19 stores this year. This is high relative to other years which have had very few store closures. These 19 stores did not have many common traits and some were comping positive, but had other issues like high shrink or potentially better real estate opportunities. 

In 2019, Ulta announced their decision to expand internationally by establishing stores in Canada, but have since canceled that expansion plan. They believe they still have an opportunity in Canada, but believe the prudent action is to focus on the U.S. during this time of uncertainty.

Stores and Ecommerce

Ecommerce has been fast growing but off a small base prior to COVID. In the past online only shoppers were only 7.5% of total shoppers whereas omni-channel shoppers were 21% of the total and spend 3x the average per year. Ecommerce sales surged to 44% of total sales in Q2 2020 and BOPIS was 20% of ecommerce sales. 

Ecommerce operating margins Pre-COVID were around 7% while in-store margins were around 12-14%. The shift to ecommerce is likely to lead to lower margins. Management has stated that their peak operating margin of 14% is likely in the past, but they believe that double digit margins are possible. During 2020, they saw a 4% operating margin headwind while stores were closed, but stated that in a normal year the ecommerce margin headwind had been closer to 0.2%-0.4%. To help negate this headwind, ULTA is looking to expand ship from store capabilities to over 100 stores by year end. Also increasing the average ticket for ecommerce would aid margins as shipping costs are reasonably fixed. 

Ecommerce average ticket price is around $60, whereas in store is in the mid $40 range. It is also interesting to note that the average ticket for BOPIS is between these amounts in the $50s. The online shopping average ticket is likely driven higher by a $50 minimum order for free shipping. 

Their rewards program makes up 95% of customers and they are expanding their credit card program. The data they garner from these sources leads them to believe that they are still not capturing the majority of womens average beauty spend. This data will allow them to continue to grow wallet share. It also allows them to target specific customers with online shopping deals based on how they typically build an order. 

Market and Competition

Ulta competes against a vast array of retailers in the beauty market; from Kroger to Macy’s to Amazon. Ulta believes they have 8% share of the total beauty market and 1% of the salon market. Ulta falls into the Specialty beauty channel where their primary competitor is Sephora. It is interesting to note that the previous CEO of Ulta (who left in 2010) purchased a competing company, Beauty Brands, with private equity in 2013, but she failed to have the same success. She left Beauty Brands in 2017 and it subsequently went bankrupt in early 2019. Luxury products may create a barrier to entry for new entrants as Ulta was not able to gain access to these brands until they had been in business for 25 years.

Ulta stores are primarily located in suburban shopping centers, whereas as their primary competitor, Sephora’s locations are primarily located in malls, with many of those locations inside a JCPenney (JCP). Sephora currently has 574 locations inside JCP locations, down from 660 a year earlier. With JCP’s bankruptcy filing the number of stores may continue to decline. This provides Ulta with a unique opportunity to gain market share from its closest competitor. While Ulta stores are in shopping centers, 84% of stores are within a 5 mile radius of a JCP.

The beauty market is driven by innovation and has seemed to follow a 3 to 4 year cycle. Ulta is partially reliant on vendor innovation and advertising to drive sales growth. 2019 was a year in which the cycle was in decline. While Ulta was still able to generate positive same store sales growth in 2019, they believe that the overall U.S. beauty market experienced mid-single digit declines.

Financial Strength

·         They have not made any major acquisitions over their history.

·         Contractual obligations amount to $2.25 B of leases and $35 M of purchase obligations.

o All of their stores, distribution centers, and corporate offices are leased.

·         The company has not typically carried debt. However, in March of 2020 they amended their credit agreement to increase the size of the revolver from $400 M to $1,000 M and drew down $800 M of the $1,000 M available on their revolver. The revolver has now been repaid.

·         The revolver matures in March of 2025. The availability is based on the lesser of $1,000 M or ~90% of eligible current assets (currently greater than $2,000 M). *Need to confirm my understanding with IR.  

o The only financial ratio covenants is fixed charge coverage, which is defined as EBITDA/ interest + principal payments and dividend payments on preferred stock.

§  Covenant requires greater than 1x

§  Current level is ~12.6x

·         Ulta does not have a credit rating since they have no public debt.


I use a simple DCF model for this company. I grow sales at ana average of 9% for the first 5 years off of a sales estimate of $6 billion for 2020 then use 3% growth into perpetuity after year 5. I use a 9% free cash flow to sales margin for each of my periods to reflect lower CAPEX due to lower sales growth, but reasonable operating cash flow margins versus history. I use a 9% discount rate to reflect a low risk balance sheet but higher risk of the retail industry driven by consumer behavior changes that are tough to forecast. This leads me to a valuation around $225 or a P/IV of 1.05 based on the current price of $238. Despite this high to fair value Ulta’s stock has shown volatility in the past where investors should be able to pick this quality company up at a decent valuation. 


·         Lack of innovation in the industry or in ability to sign brands to permanent or temporary exclusive deals.

·         Increase in corporate tax rate. Tax rates declined to ~22-23% under the new tax law from 36-37% prior to the decrease in tax rate.

·         95% of purchases are by rewards members, so growth could slow as rewards program growth slows.

·         U.S. store growth may be close to saturation and could lead to new stores cannibalizing current store sales and lower margins.

·         In store shopping may decline leading to delevering and lower growth from new store openings.

Why is it interesting?

·         Clean balance sheet with no debt. However, they do lease all properties.

·         Seemingly necessary product with higher levels of interest from the younger social media driven generation. You always have to be Instagram/selfie ready!

·         Solid growth with high single digit same store sales growth on average. They seem to still have an opportunity to increase market share, especially considering the reduction in Sephora locations.


·         Consistently positive free cash flow, double digit returns on capital and high ROEs without being “juiced” by leverage. 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


Market share gains driven by closure of JCPenny stores which contain Sephora store-in-store display areas. Also, continued demand growth driven by generational and demographic trends. 

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