Ulta Magnificence Q1 Earnings: The Cosmetics Queen (NASDAQ:ULTA)

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In my first article on Ulta Magnificence (NASDAQ: ULTA), I applied a maintain advice on it and stated buyers ought to watch for a pullback earlier than shopping for the inventory. Since my advice on April 8, Ulta It did drop again into the $345-$350 vary earlier than bouncing again after some beautiful earnings leads to the primary quarter.

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Final week, Ulta rose 22.8%, and as proven within the chart above, shares surged after beating earnings and, extra importantly, elevating steering.

Huge quarterly earnings report beats estimates and increases guidance

information change (Ulta Q1 press launch)

Once I was on trip for many of final week, I could not converse to the SA group about Ulta’s pullback and shopping for alternative, because the inventory hit the $340-350 mark forward of earnings.

Paper overview

Trying again on the thesis of my unique article, there have been three key factors that motivated my preliminary buy of ULTA inventory.

  1. Robust and Loyal Buyer Base
  2. Rising variety of shops and SSS
  3. Stellar Finance and Repo

Robust and resilient enterprise mannequin

Ulta’s earnings show that the cosmetics enterprise could be very sturdy. Ulta reported earnings of $6.30 per share (over $1.82) on income of $2.34B (over $220 million), indicating that many retailers have delivered sturdy development in a difficult surroundings. As we will see from the 1-month share worth chart beneath that compares Ulta to direct and oblique rivals, the sweetness retailer has been a high performer.

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Based on the corporate’s 10-Q:

Though We don’t consider that inflation has had a major affect on our monetary place or working efficiency to this point, continued strain on inflation might adversely have an effect on shopper spending and gross sales.

The above quote demonstrates Ulta’s dominance and management within the beauty section. Moreover, it reveals that regardless of the retail challenges, they do develop a loyal buyer base, a key argument in my earlier article that led me to purchase my first share of Ulta in early 2021.

Proceed to depend on knowledge and capitalize on traits

By including new manufacturers and increasing current manufacturers, Ulta continues to broaden its product depth and drive comparable gross sales development. CEO Dave Kimbell talked about this in the course of the firm’s first-quarter earnings name.

From a pattern perspective, foundations, concealers, eyeliners and lipsticks continued to ship sturdy ingredient development. New model Mass beauty manufacturers like Fenty Magnificence, Ariana Grande’s REM Magnificence and Treslúce, a mass cosmetics model based by Latin musician Becky G, contributed to the quarter’s development.

New product launches from plenty of manufacturers together with Clinique, Lancome, NARS, elf and NYX additionally led to sturdy gross sales development. Moreover, this quarter we expanded MAC to 233 new shops and launched CHANEL Magnificence to 104 shops.

Ulta Magnificence’s skill to show the very best manufacturers on the shelf is a key supply of its aggressive benefit. As a frontrunner in magnificence, manufacturers rely partly on Ulta’s retail distribution to achieve publicity to their merchandise. The power to promote well-known manufacturers like Ariana Grande, Becky G and Kylie Jenner drives buyer visitors and builds a loyal buyer base.

Loyalty Rewards High Customer Growth

creator created (SA Earnings Transcript)

As proven above, Ulta continues to drive buyer loyalty by means of its rewards program, with greater than 37 million “Ultamate Rewards” members.

Goal partnership progressing properly

In my earlier article, Ulta’s partnership with Goal (TGT) was a key catalyst that has the potential to additional increase Ulta’s high line. Because the eighth largest retailer within the US with over $100B in annual income, Goal generates hundreds of thousands of foot visitors that may profit Ulta.

In Ulta’s F’21 10-Okay, it mentions that the goal location has the potential to be round 800 Ulta in the long term. In the course of the quarterly convention name, Chief Working Officer Kecia Steelman made feedback.

As of at present, we have now 140 shops open.Sure Over 250 shops are anticipated to open with them this 12 months, However we like what we see. After we enroll members in our Final Rewards program, what we see is that they behave very equally to our current loyalty members. When it comes to manufacturers, Ulta Magnificence works carefully with companions, with our model companions on classes and so forth, however Goal actually owns the gross sales. Due to this fact, we’re at the moment not approved to touch upon particular gross sales efficiency of manufacturers.

Whereas Ulta couldn’t touch upon the particular gross sales efficiency of the partnership, it opened solely 100 shops on the finish of F’21 and plans to open 250 by the top of the 12 months (30% of its long-term goal). Whereas it will be good to measure some quantitative efficiency indicators, I consider it is secure to say that this partnership will probably be useful for Ulta.

Why Ulta might be able to resist inflation

The most well liked subject impacting markets post-COVID is inflation and its affect on U.S. companies. Nonetheless, Ulta talked about that inflation shouldn’t adversely have an effect on its enterprise. For a enterprise to thrive in instances of inflation, it will need to have pricing energy so as to cross the prices on to shoppers to take care of its revenue margins.

When requested about first-quarter earnings, Kimball stated models per transaction had been truly flat 12 months over 12 months, suggesting prospects are prepared to spend extra per transaction.

This Models per transaction had been roughly flat in comparison with the identical interval final 12 months. So once more, we’re seeing quite a lot of the advantages of what I name the continuation of the general reasonable promotional surroundings, coupled with the combo of manufacturers that we have moved into that class final 12 months.

Promotions akin to 21 Days of Magnificence, mixed with the launch of the brand new model, apparently have Ulta prospects coming again to the shop to purchase extra. When requested by analyst Korinne Wolfmeyer about any noticeable shifts between mass-market and status manufacturers, Kimball stated there was no significant shift in demand between the 2 segments.

To this point our company are managing by means of it and we’re Didn’t see a big impact. In actual fact, as I discussed within the script, status make-up carried out a bit increased than mass make-up…

…one of many distinctive issues that we predict is on the coronary heart of our mannequin is We now have a variety of merchandise, all worth factors, from mass to status, all classes, hair care and skincare, make-up and tub and perfume. So with the ability to modify and adapt as shopper wants change has lengthy been our mannequin, permitting us to answer any disruption out there.However now, we’re seeing energy in each facet of the enterprise

Additionally, whereas many might imagine that cosmetics are usually not a necessity regardless of sturdy gross sales, knowledge reveals that skincare and haircare routines nonetheless work. Skincare posted sturdy double-digit gross sales within the first quarter, just like the primary quarter of final 12 months.

Whilst they enhance beauty use, magnificence lovers Sustain with their skincare routine. Consequently, skincare posted sturdy double-digit gross sales on high of sturdy double-digit development within the first quarter of final 12 months.

Moisturizers, Eye Serums and Zits Remedies Continued to drive class development this quarter. We additionally noticed sturdy development in solar safety and self-tanning, with shoppers growing journey and socializing.

Huge gross and operating margins

Gross and Working Margin (Tikel)

The chart above demonstrates ULTA’s skill to persistently enhance working margins (inexperienced line on the graph) and preserve a robust 40% gross margin (blue line) within the first quarter of 2022.

repurchase dedication

Because the Warren Prophet Buffet in Omaha highlights:

Our most invested firms have have interaction in main inventory repo Typically there’s a huge distinction between worth and worth.

As proven within the second picture above on this article, Ulta has dedicated $900 million for F’22 share repurchases. Within the first quarter, Ulta repurchased 332,000 shares at a price of $132.8 million, a median value of $400 per share.Whereas $132.8 million will not be necessary The buyback demonstrates that Ulta’s administration believes within the inventory and is targeted on decreasing the variety of shares excellent to drive shareholder returns.

stock buybacks, buybacks, capital allocation, Warren Buffett

creator created (Ulta 10-Okay (2012-2021))

The chart above additional illustrates Ulta’s sturdy historical past of allocating extra capital, decreasing its diluted share rely since 2014. The chart beneath reveals Ulta’s 10-year EPS, which can proceed to be enhanced by buybacks.

Huge EPS Growth

EPS pattern (Ulta 10-Okay)

The excessive finish of Ulta’s EPS steering ($20.10) implies a robust year-over-year development of 12% in F’22.

Valuation

Regardless of Ulta’s worth enhance, it nonetheless trades at a really affordable 20 instances earnings. Whereas that is increased than different retailers, Ulta’s trade management and above-average revenue margins justify its increased a number of relative to its peer group.

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Because the chart above reveals, Ulta trades at about 20 instances earnings, properly beneath its 5-year common. Whereas Ulta is not low-cost by any means, it is a actually good enterprise at an important worth. Whereas the present macro surroundings might nonetheless create near-term headwinds, Ulta has sturdy fundamentals, a high quality enterprise mannequin, and an inexpensive price-to-earnings ratio.

stable enterprise

Total, the primary quarter proved that Ulta is, in truth, the queen of make-up and sweetness as an entire. With record-breaking numbers, the addition of recent manufacturers, and a dedication to proceed shopping for again inventory, I might improve my advice on Ulta to a purchase. Sure, I do know… at $401 final month, I stated it was a “maintain” and buyers ought to watch for a pullback. A pullback did in truth occur, however Ulta bounced again instantly and is now above $400 as of this writing.

On the finish of the day, Ulta is a superb enterprise with very loyal prospects who’ve high manufacturers in each the mass and status classes. With its best-in-class loyalty program and skill to adapt to buyer preferences, Ulta is a wonderful addition to its product portfolio.

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