A Beauty of a Stock with Beastly Growth

Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

ULTA (NASDAQ: ULTA) is the largest beauty retailer in the United States, with 550 stores containing over 20,000 products. Each location also contains a salon, which provides services for hair, nails, and skin. ULTA has a vision of providing the best products for the lowest prices, putting them in a great position to continue taking share in the space. The company’s growth strategy is what sets them up for success. In this plan, they have accelerated growth with an aim of having 1,200 stores in the United States, as well as carrying more products, enhancing its loyalty program, expanding its marketing, and improving operating margins. What more could you ask for?

The companies most similar to ULTA are Sally Beauty Holdings (NYSE: SBH) and Regis Corp (NYSE: RGS). Sally Beauty Holdings has several thousand locations in 12 countries, and has a strong growth strategy too. They plan to expand domestically as well as internationally, while increasing same store sales through a new loyalty program.

Regis Corp operates hair care salons with a retail side, selling products. They are somewhat of a backwards ULTA, since they specialize in salons and have less of a focus on the retail side. Regis Corp operates 12,600 locations in both the United States and international markets. With all of this said, Sally Beauty Holdings and Regis Corp each have one major flaw: they are old news. Brands come and go quickly these days, and ULTA is what's "in" right now. This applies whether you are going out to shop or are buying online. The ULTA name is that strong. 

At the market close on Feb. 1, ULTA was priced at $97.54 per share. At this level, ULTA is trading at 40.52 times earnings. This seems steep, but investors will pay up for high growth stocks such as this. They are trading at just 28.69 times 2013 earnings and about 22 times 2014 earnings. With the expected store growth, these earning expectations are much too low and will rise a substantial amount.

 

ULTA does not currently pay an annual dividend, but they did pay out a $1 special dividend in 2012. I believe they will continue a special payout over the next few years. With a growth stock like this, do not expect a dividend until after the high growth slows to a moderate pace. Sally Beauty Holdings does not pay a dividend either, which I found surprising. They have a very strong balance sheet and could afford to pay out a few cents per quarter. However, they may still consider themselves to be in "growth mode," and a dividend could come into play later. Regis Corp currently pays out a $0.24 dividend, or 1.40%. This is a positive for the stock, but still isn't enough to entice me as an investor.

ULTA is currently 5.78% below its 52 week high of $103.52 reached on Sept. 7, 2012. With the growth factor, there are great things coming for this company and its stock. If ULTA were to trade at the same multiple in 2013, that would put the stock above $135 per share. This would not be a fair multiple, so it probably will not reach those levels, but $120 is my fair target. This would represent a move of over 23% for the year. Both Sally Beauty Holdings and Regis Corp have the potential to run up this year, but I see ULTA outperforming the sector. I am initiating an outperform for ULTA on CAPS. ULTA is a long term BUY.

 


JoeySolitro1 has no position in any stocks mentioned. The Motley Fool recommends Ulta Salon, Cosmetics & Fragrance. The Motley Fool owns shares of Regis and Ulta Salon, Cosmetics & Fragrance. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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