Ulta Beauty (NASDAQ:ULTA) must put up robust FQ4 final results on the back again of a very fantastic attractiveness classification backdrop. On the other hand, the inventory seems properly priced at existing levels, and I believe there are improved expense alternatives in the magnificence place at the minute.
ULTA is the major elegance retailer in the U.S. providing cosmetics, fragrance, pores and skin care items, hair treatment products and solutions, and salon companies. The enterprise has around 1,300 merchants in all 50 states. It also sells its merchandise by its e-commerce web page.
The retailer sells both equally prestige and mass-sector attractiveness solutions, supplying a wide variety of cost factors across its retailers. In complete, it stocks more than 25,000 items from additional than 600 natural beauty brands. It also has its personal non-public-label brand.
Close to 43% of its sales come from cosmetics, while haircare signifies 20% of profits. Skincare and fragrance make up 17% and 14% of revenue, respectively.
ULTA has just one of the strongest loyalty programs in retail, boasting ~39 million associates. An astonishing ~95% of product sales coming from loyalty customers.
A person of ULTA’s development drivers is the continued introduction of new products and manufacturers. The enterprise suggests, historically, new items have averaged 20% to 30% of its product sales. ULTA has completed a excellent position of regularly acquiring and introducing sizzling new models.
In this vein, it is really been especially targeted on promoting the skincare and fragrance groups. On its fiscal Q3 earnings simply call, CEO Dave Kimbell mentioned:
“Turning to the effectiveness of our main categories, commencing with our fastest-escalating group, skincare. Natural beauty enthusiasts are retaining their skincare routines with a emphasis on science-backed and dermatologist-encouraged products. Visitors are partaking with more recent makes, like Drunk Elephant, Super Goop and Great Molecules, while new merchandise from proven brand names like the Ordinary Hero Cosmetics and the Roche-Posay also contributed to profits growth.
“To push discovery and guidance guest education and learning, this quarter, we released our Skincare We Adore All in all retailers. This curated presentation highlights interesting brands and most effective-marketing things across vital categories. The fragrance and tub class shipped a further extraordinary quarter, as Gen Z visitors engaged with the classification, leveraging multiple fragrances to express them selves. Not long ago introduced Ulta Elegance distinctive Billie Eilish, as perfectly as Nescens from Burberry, Gucci and Victor and Ralph drove significant revenue growth. While our month to month fragrance crush software drove engagement with recognized brands including Versace and Jimmy Choo. In addition, the category benefited from robust guest engagement with our vacation fragrance gift sets, which had been out there previously this calendar year.”
In several strategies, ULTA essentially assists drive a new brand’s reputation, so it is usually the go-to associate for new, up-and-coming brand names. This is a impressive placement to be in for the enterprise.
Shop enlargement and lease optimization are another chances for ULTA. The business thinks it can achieve 1,500-1,700 merchants in the U.S. It has identified more than 100 DMAs the place it by now has large market place share where by it thinks it can leverage its brand name and additional penetrate white place, and yet another just about 50 DMA in which it has a reduce marketplace share but higher profitability it can go after.
Building stores-in-outlets within just Target (TGT) is also a pleasant prospect. TGT tends to have a a little extra upscale buyer foundation, so ULTA currently being capable to present some much more status items outside of TGT’s mass cosmetic offerings need to be a win-acquire for both equally organizations. In addition, though not in its around-time period programs, worldwide enlargement is also on ULTA’s radar.
The company also has a bunch of lease renewals coming up through 2024. Provided the retail leasing marketplace, ULTA need to be capable to decrease rent costs, enhance the seem of its suppliers, and/or discover superior destinations.
As a more experienced retailer, optimizing its infrastructure, e-commerce talents, and strengthening its offer chain are other locations the place ULTA can keep on to enhance. In the latest several years, the company has also enhanced its CRM abilities to assistance far better comprehend and focus on its buyers. Electronic initiatives these kinds of as digital make-up check out on, personalised purchasing, and merchandise finders can also go on to travel the user knowledge and thus growth.
The economy and a cautious consumer are on the minds of most shops, as inflation continues to be elevated, decreasing shopper purchasing power and discretionary cash flow. However, the revenue of cosmetics have typically been powerful in the course of these intervals, even in the course of recessions. Typically referred to as the “lipstick index,” the phrase was coined by Estée Lauder’s (EL) Leonard Lauder who found that during financial downturns, the sales of cost-effective minimal luxuries like cosmetics rose.
The lipstick index or not, it will be fascinating to see if there is any trade-down outcome. Beauty corporations e.l.f. Beauty (ELF) and Coty (COTY) the two observed sturdy product sales in their mass models. Although a trade-down into mass could hurt ULTA’s gross sales, it is fortuitous plenty of to supply both equally prestige brand names and mass models, as perfectly as what it calls masstige, which is what is in the center.
One more threat ULTA faces is substantial expectations. The enterprise has set up potent figures about the previous year, and the stock has performed really perfectly around the previous couple of yrs. At this level, anticipations show up to be very high that this will continue on.
ULTA trades all-around 15x the FY2024 (ending January) consensus EBITDA of $1.86 billion and 14x the FY2025 consensus of $1.94 million.
It trades at a forward P/E of 21x the FY24 consensus of $24.20. Based on 2025 analyst estimates of $26.12, it trades at just underneath 20x.
Comparatively, cosmetic firm EL is valued at ~21x fiscal ’24 EBITDA (ending June) and ELF is valued at 30x FY’24 EBITDA (ending March).
However, ULTA is a retailer not a manufacturer, and merchants typically trade at lower multiples than thriving models, as makes can have extra staying electric power and the ability to expand via amplified distribution and worldwide expansion. Suppliers usually trade below 12x EBITDA and beneath 15x ahead PE.
ULTA’s stock has been a juggernaut, and with potent commentary from the likes of ELF and COTY, as perfectly as L’Oréal with regard to North America, I assume the retailer to put up sturdy Q4 results when it experiences later on this month. Attractiveness has been a person of the strongest retail categories out there, with the two strength in cosmetics as very well as fragrance.
A 15x EV/EBITDA several for a extra mature retailer does experience a little bit substantial, while I believe it is an ideal valuation offered ULTA’s defensive character and the powerful recent magnificence current market. However, within just the beauty house, I do desire COTY as a turnaround tale and ELF as a advancement tale.
If I owned ULTA I’d go on to keep the inventory, but I would not be a new customer at current amounts.