Ulta Beauty: Beautiful Figures

Retailing is generally a tough business. There is a lot of price competition that keeps margins low. There is also inventory risk. Still, even in tough environments, some retailers manage to stand out and earn good returns on capital. ULTA is one of them.

ULTA is a specialty retailer that sells beauty-related products to shoppers. This includes cosmetics, haircare, skincare, etc. products. They are the largest beauty-related retailer in the US and have experienced stellar growth in the past:

10-year growth CAGR figures:

Revenue: 19%
Operating Income: 34%
EPS: 37%

Interestingly enough, shares outstanding only went from 59M to 62M during this time and total debt went down from 106M to 0! So all of this growth was financed mostly from within the business.

While past growth has rewarded past shareholders, we care about the future. I think there is plenty of growth still to be had for ULTA:

1. Number of physical stores can double from 1k to 2k.
2. Ecommerce sales can grow at double-digit CAGR for the next 10 years.
3. There should be operating leverage at play.

In 5 years (by 2023), I expect revenue to be $8B, up from the current $5.8B. Net Income should be 12% of that, which means $880M. Share count may be around 58M which means EPS will be $15. A multiple of 18x seems reasonable to me, which means the stock will trade at $270.

At a current price of $250 or so, the stock doesn't offer very attractive returns, but it should be a buy around $150 or so. I wish I had read the annual reports of ULTA a few years earlier!