Ulta Beauty (NASDAQ:ULTA) confirmed robust resistance final yr regardless of going through a risky financial system with rising charges and inflation. Its share worth was up 13.8% for 2022, considerably outpacing the S&P 500 Index which declined by 19.4%. It has additionally been a long-term winner up to now decade with a shareholder return of over 400%. Despite now buying and selling close to a historic excessive, I imagine the corporate will proceed to outperform. The market for magnificence is extraordinarily large and continues to develop. Sales channels stay very fragmented and consolidation ought to present tailwinds for the corporate. Digital gross sales are seeing stable traction as e-commerce turns into increasingly widespread after the pandemic. Wellness can be a lesser-known alternative with robust potential that would develop into vital within the coming years. Its present valuation additionally seems to be enticing as multiples are nonetheless under its historic common. Therefore I fee Ulta Beauty as a purchase on the present worth.
For folks which can be unfamiliar with the corporate, Ulta Beauty is the most important magnificence retailer within the US based again in 1990. It sells quite a lot of merchandise from 600+ manufacturers together with skincare, hair care, cosmetics, and extra, with an ambition to turn into the one-stop store for every thing magnificence. It has over 1,300 shops throughout the states with 39 million loyalty members.
Ulta Beauty has an enormous TAM (whole addressable market). According to Statista, the worldwide magnificence & private care market is at present $571 billion and is estimated to develop to $663 billion in 2027, representing a CAGR (compounded annual development fee) of three.8%. According to Ulta Beauty, the US market alone has a TAM of $91 billion and is predicted to develop at a 2%-4% CAGR. This is pushed by the next consciousness of self-appearance and physique care, and elevated affect from social media platforms like TikTok.
The adoption of e-commerce is a big development driver for the corporate. Since the pandemic, increasingly persons are used to buying on-line as it’s far more handy, particularly for return clients that already know what they want. According to Statista, solely 18.4% of whole magnificence merchandise have been offered on-line in 2019. The quantity has elevated to 25.4% in 2022 and is forecasted to hit 33% in 2025. While Ulta Beauty doesn’t disclose its e-commerce numbers, it did point out in its investor presentation that digital gross sales grew by 35% CAGR from 2017 to 2021. The rising penetration fee for e-commerce ought to considerably profit the corporate’s digital gross sales.
The present gross sales channels are extraordinarily additionally fragmented, which embody grocery shops, e-commerce, DTC (direct to shopper), drug shops, department shops, specialty shops, and so on. None of those channels has a dominant market share which presents an enormous alternative for Ulta Beauty. to turn into the go-to one-stop store.
The firm has completely different aggressive benefits in opposition to different channels. Firstly, they provide each in-store and on-line buying which vastly will increase buyer engagement and comfort. Compared to generic shops (drug shops/department shops), their employees has a lot deeper information about completely different merchandise which boosts buyer expertise. While in comparison with specialised boutiques and DTC manufacturers, it has much more shops in a number of areas with a lot broader alternatives.
It additionally gives in-store providers equivalent to haircuts, hair coloring, wax providers, and ear piercing, which different channels don’t have. The firm can be increasing its attain by means of its partnership with Target (TGT). It is now organising its shops inside over 350 Target which ought to additional enhance model consciousness. I imagine the market will begin to consolidate which will likely be a robust tailwind for Ulta Beauty.
Wellness can be an rising alternative for Ulta Beauty. This contains merchandise equivalent to dietary supplements, sleep-related merchandise, spa merchandise, and so on. Wellness is getting more and more widespread with folks now emphasizing extra on self-care, sleep, and psychological well being. According to McKinsey, wellness is a whopping $450 billion market within the US rising at a CAGR of 5%+. The firm is slowly scaling its choices in wellness and I imagine this might ultimately turn into an enormous development driver sooner or later.
Dave Kimbell, CEO, on Wellness:
Finally, we proceed to extend our presence in wellness. During the quarter, we additional enhanced our assortment to mirror our visitor evolving wants. While wellness represents a small a part of our general enterprise in the present day, we imagine it’s a vital longer-term development alternative given the incrementality of the acquisition and the robust emotional connection customers have with self-care.
Despite its share worth buying and selling close to an all-time excessive, the present valuation for Ulta Beauty nonetheless appears to be like compelling. The firm at present has a PE ratio of twenty-two.1x. From the primary chart under, you may see that that is close to the low finish of its historic valuation. Compared to its 5-year common PE ratio of 33x, the present worth represents a reduction of round 33%. There are not any different magnificence retailers within the market subsequently it’s arduous to make a direct comparability however when in comparison with different specialty shops, multiples are nonetheless low. From the second chart under, you may see that its PE ratio is under retail shops like Five Below (FIVE) and Tractor Supply (TSCO). It can be value noting that Ulta Beauty is rising income at a faster tempo with double-digit will increase whereas the opposite two firms above are rising at simply single digits. I imagine it’s doable to see its valuation return to the 5-year common which ought to supply stable upside potential.
In conclusion, I nonetheless like Ulta Beauty on the present stage and I imagine it might proceed its robust momentum this yr. It operates in an especially giant and fragmented market that’s increasing and due for consolidation. It has vital aggressive benefits in opposition to different gross sales channels and will dominate the market and turn into the one-stop store for magnificence. The penetration fee for e-commerce is predicted to develop which ought to present tailwinds for digital gross sales. While wellness additionally presents an enormous untapped alternative for potential development. Most importantly, the present valuation continues to be discounted in comparison with its historic multiples. Therefore I fee the corporate as a purchase.