Salon Services Could Make You Rich

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

The thing with beauty and salon products is that that their demand doesn't easily dwindle. People usually don’t experiment with skin care products, and that is the rationale behind their steady demand. Additionally, the demand kicks up when people have more disposable income to spend. The unemployment rate dipped to 7.8% recently, and consumer spending has risen 13.5% YTD. Ulta Salon Cosmetics and Fragrance (NASDAQ: ULTA) is the company we’re bullish on, and here are a few reasons why you should be too.

Ulta Salon, besides being a beauty products manufacturer and marketer, also provides salon products and services. The product line of the company has more than 21,000 products, and the firm operates nearly 500 stores, providing full salon services at each of them.

The financial results were positively greeted by the market, which drove the share price of Ulta Salon to its all-time high levels. Ulta Salon reported better than expected revenues of $481.7 million, up 22.1% from the last year's quarter. EPS surged 42%, which also beat the Street’s estimates. Adding to the delight of the investors, the management raised its annual EPS guidance to $2.6, higher than the street's estimated $2.55. The management also announced that the company’s gross profit margin expanded to 34.8%, up by 0.08%.

The company opened 22 new stores in the quarter and would be looking to open 52 new stores in the current quarter. Over the course of the current fiscal year, the company aims to open 100 new stores, along with a square footage increase of 22%.

The prime reasons behind the stellar financial performance of the company are the Lancome and Clinique boutiques. These boutiques offer premium products and services, and thanks to the increased consumer spending and reduced jobless claims, consumers are now willing to pamper themselves with the expensive offerings of Ulta. The company is looking to add 50 Lancome boutiques and 35 Clinique boutiques in the near future.

Ulta Salon shares its market space with Regis Corp (NYSE: RGS) and Macy’s (NYSE: M).

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Debt/Equity</p> </td> <td> <p>Net Profit Margin</p> </td> <td> <p>ROE</p> </td> </tr> <tr> <td> <p>Ulta Salon</p> </td> <td> <p>0%</p> </td> <td> <p>7.32%</p> </td> <td> <p>25.58%</p> </td> </tr> <tr> <td> <p>Regis Corp</p> </td> <td> <p>32%</p> </td> <td> <p>-3.74%</p> </td> <td> <p>-11.99%</p> </td> </tr> <tr> <td> <p>Macy’s Inc.</p> </td> <td> <p>118%</p> </td> <td> <p>5.01%</p> </td> <td> <p>22.65%</p> </td> </tr> </tbody> </table>

Source: Finviz

Amongst its peers, Ulta Salon enjoys the highest net profit margin and the highest returns on its equity. Additionally, the company operates with little or no debt, and to top it all, analysts expect EPS growth over the next 5 years to exceed 26%.  However, Ulta Salon trades at a moderately high forward P/E multiple of 28x, and PEG stands at 1.6x. The metrics indicate that the stock isn’t undervalued by any means, and investors looking to invest in Ulta should tread with caution.

The attached chart shows that Ulta Salon has outperformed its peers in terms of stock returns, over a period of 5 years.

<img src="" />

ULTA data by YCharts

Overall, the company has a huge line up of products offered in 489 stores. The success of Lancoma and Clinique boutiques was astounding, and with the company’s expansive drive, future looks bright. Additionally, since Ulta Salon operates with little or no debt, the company could add more stores in the current fiscal year than it previously projected. Also, with increasing consumer spending, I believe that the stellar financial performance is set to continue. Ulta Salon has a good mix of fundamentals and its stock has performed well, and it is due to these reasons that Ulta Salon has a Foolish Buy rating.


PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Regis and Ulta Salon, Cosmetics & Fragrance. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.

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