COMPANY PROFILE

At Ulta Beauty (NASDAQ: ULTA), the possibilities are beautiful. Ulta Beauty is the largest U.S. beauty retailer and the premier beauty destination for cosmetics, fragrance, skin care products, hair care products and salon services. In 1990, the Company reinvented the beauty retail experience by offering a new way to shop for beauty – bringing together all things beauty, all in one place. Today, Ulta Beauty has grown to become the top national retailer offering the complete beauty experience.

Ulta Beauty brings possibilities to life through the power of beauty each and every day in our stores and online with more than 25,000 products from approximately 500 well-established and emerging beauty brands across all categories and price points, including Ulta Beauty’s own private label. Ulta Beauty also offers a full-service salon in every store featuring hair, skin, brow, and make-up services.

Ulta Beauty is recognized for its commitment to personalized service, fun and inviting stores and our industry-leading Ultamate Rewards loyalty program. As of August 3, 2019, Ulta Beauty operates 1,213 retail stores across 50 states and also distributes its products through its website, which includes a collection of tips, tutorials, and social content. For more information, visit www.ulta.com.

Recent Earnings

The quarter was fine but the outlook took investors by surprise. Here’s the details.

The Company has updated its fiscal 2019 outlook to reflect anticipated industry-wide sales headwinds in cosmetics and currently expects to:

• open approximately 80 new stores, execute approximately 20 remodel or relocation projects and complete approximately 270 store refreshes;

• increase total sales between 9% and 12% (previously low double-digit growth);

• achieve comparable sales growth of approximately 4% to 6% (previously 6% to 7%), including e-commerce growth of 20% to 30%;

• deleverage operating profit margin rate in the range of 60 to 70 basis points (previously leverage in the range of 10 to 20 basis points);

• deliver diluted earnings per share in the range of $11.86 to $12.06 (previously $12.83 to $13.03), including the impact of approximately $700 million in share repurchases and assuming a 23% effective tax rate (previously 24%);

• incur capital expenditures of $340 million to $350 million (previously $380 million to $400 million); and

• incur depreciation and amortization expense of approximately $300 million (previously $315 million).

This is likely what caused a bigger sell-off than the reduced guidance. Analysts are so funny, they can’t stand when companies stop spoon-feeding them guidance for their “models”. As previously discussed, to more closely align with industry practices the Company no longer provides a quarterly outlook. The Company will continue to provide an annual outlook, which it will update on a quarterly basis, as appropriate.

Opinion

From a factor scoring perspective versus the other 199 brands in the brands index, here’s where ULTA scores well as of 9/17/19:

• 85% for 3 year sales growth

• 91% high free cash flow growth

• 84% high 3YR ROE

• 92% high ROIC (return on invested capital)

• 85% high ROIC over WACC (weighted cost of capital)

When growth and momentum investors cluster in a company that disappoints short-term, they tend NOT to be price sensitive and often leave skid marks on the way out. On the day after the 8/28 earnings announcement, ULTA stock dropped 29% on 15x normal volume, that kind of volume is the definition of full capitulation. The committed investors that are not in the stock for 1-2 quarters will be adding to positions opportunistically and the uncommitted have already likely moved on. IMO management knew they eventually could not sustain the hyper growth profile so they took their lumps and lowered expectations to a level that’s much more sustainable. I really like this stock under $225-230.

With >1000 stores, investors should not expect the same rapid revenue acceleration as they have seen in the past given the store saturation. Anyone that was surprised by managements comments hasn’t been paying attention. The future for Ulta largely transitions to becoming a recurring revenue machine generating consistent growth through all its stores and a goal of generating higher transaction volumes per customer by offering new, in-demand products and services including the Salon. Bottom line, the beauty and cosmetics market is highly fragmented and has frequent periods of time filled with customer tradition. The cosmetics business has slowed a bit but ULTA’s brand relevance and loyalty is not in question. There’s lots of opportunities to roll up additional market share if you can offer a superior experience, the right products and services at the right price points and using the correct blend of in store, in app, online technology. Having a physical store in every important community is a key to this end-goal. Online sales will continue to grow well but it’s the in-store experience and “impulse visits” that offer a true competitive advantage over peers. With the demise of the department stores and poor drug store experiences, Ulta is in the driver seat for strong market share gains and continued revenue growth. In my opinion, ULTA management ketch-sinked this quarter, re-set expectations to a more sustainable level and the stock now offers a much better entry point. I’ve added to the stock once after the big draw-down and I’m happy to add to it again. Vanity will never go extinct and brands serving the beauty market will offer the predictability we want in a slower global economy.