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Ulta Salon Can’t Stop Won’t Stop

Stock (Symbol)

Ulta Salon (ULTA)

Stock Price

$261

Sector
Retail & Travel
Data is as of
January 14, 2017
Expected to Report
Mar 9
Company Description
Ulta Salon, Cosmetics & Fragrance, Inc. (Ulta) is a beauty retailer. The Company provides salon products and salon services in the United States. It offers a combination of more than 20,000 prestige and mass beauty products. As of January 31, 2015, it operated 774 stores in 47 states. The Company offers products in the categories, including cosmetics, which includes products for the face, eyes, cheeks, lips and nails; haircare, which includes shampoos, conditioners, styling products and hair accessories; salon styling tools, which includes hair dryers, curling irons and flat irons; skincare and bath and body, which includes products for the face, hands and body; fragrance; nail polish and nail care products; men’s skincare, haircare and fragrance products; private label, consisting of Ulta branded cosmetics, skincare, bath and body products and haircare, and other health and beauty products. Source: Thomson Financial
Sharek’s Take
David SharekUlta Salon (ULTA) just can’t stop, won’t stop as the largest beauty store in America continues to impress with 24% sales growth last qtr, including 17% same store sales growth (SSS). To me SSS is the most important number to a retail stock, with premier growth stocks attaining SSS growth of 10% or more. ULTA crushed that number. E-commerce sales jumped 59% last qtr. Its website offers tremendous growth opportunity as e-commerce was 5.5% of sales in 2012, is 7% of sales today and is on track to be 10% by 2019. One thing to note is Ulta includes e-commerce in its SSS, thus the SSS figure is thought of as inflated by some short sellers (who were negative on the stock around $170 just as ULTA started its run to $270). This is a great stock with an excellent management team which uses statistics and analytics to achieve superior performance. Instead of relying on discounts and price promotions, Ulta uses a sophisticated loyalty program then targeted offers and utilizes loyalty points as currency. When I last checked, Ulta Salon has a 4% of the overall US beauty market (6% of products and 1% of services). Profits are growing around 25% a qtr and management expects at least 20% profit growth to continue through 2017, 2018 and 2019. With Macy’s closing 100 stores profits could rise even more. My only issue is the stock sells for a lofty 33x earnings, and with the Retail sector being extremely weak right now I’m trying to be patient and let the stock come down to around $240 before buying in.   
One Year Chart
This stock has jumped around $100 in the last year — what a run. A year ago in my 2015 Q4 review the stock had a P/E of 32. So that move was largely due to profit growth, which zoomed past analyst estimates. Last qtr ULTA was expected to post profit growth of 23% and delivered 26%. That was a 4 cent beat, but ULTA beat by 16 cents 3QtrsAgo and 4QtrsAgo. 2016 profit estimates have climbed from $5.98 to 6.13, $6.29 and $6.41 the last 4 qtrs — solid. 2017 est have gone from $7.24 to $8 during the span. Qtrly profit Estimates are 26%, 23%, 25% and 23%.
Fair Value
My Fair Value is 35x earnings, but the P/E was lower in prior years. Although I feel the stock is worth $280 these charts give me pause. I don’t want to buy so high, and think its more prudent to wait for a correction of some sort. This 30+ P/E is unsustainable long-term.
Bottom Line
Ulta Salon has been one of the best stocks to own the past decade, but in the ten-year chart you can see the stock took it to another level last year, and perhaps needs to come down some or base here for a bit. The Retail sector is very weak, and that could cause ULTA to decline some. This stock has support at $225 and that’s 28x earnings. $225 is a good wish price to get in at, but with the company clicking on all cylanders I doubt it would fall that much, thus I’ll look to get in around $240 if I can.
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