This Stock Keeps Hitting Home Runs, Are You Watching?

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

Ulta Salon, Cosmetics & Fragrance (NASDAQ: ULTA) is a solid company which just fails to disappoint each time it comes out with its quarterly report. This fact once again hit home when Ulta beat consensus estimates convincingly in its recently-reported third-quarter and provided an upbeat outlook for the current quarter. In addition, the company raised its full-year guidance and saw its shares gain almost 7.7% post results.

I have been bullish about Ulta’s prospects for quite some time now, and I was of the opinion that the stock will break through its 52-week high to new highs around three months back. The stock might not have broken through that barrier since then, but my opinion that it should create new highs still stands.

Consistently Solid

Ulta is a fundamentally solid company and it has got a lot of room to flex its muscles. It has witnessed double-digit top line growth in the last five quarters, and its bottom line has been no laggard either.

In its recently-reported quarter, Ulta delivered yet another solid revenue jump of 22.4% and net income spiked 42.5% from the year-ago period on the back of an 8.4% jump in same-store sales. In addition, the company has seen its gross margin grow at a steady pace in the last five years, appreciating almost 17%.

Driving Growth

Ulta is focused on delivering such impressive numbers on a consistent basis and is pursuing strategies such as building more stores, introducing new products and strengthen its e-commerce platform among others.

The company opened a record 49 stores in the third-quarter, taking its total store count to 537 stores in 45 states. More importantly, Ulta is witnessing better-than-expected performance from its stores opened this year. The company has already completed its store expansion target for this fiscal in the first month of the current quarter, and has grown its square footage by 23%.

In the coming year, Ulta plans to increase its square footage growth by 22% by opening 125 new stores. In addition, Ulta has been launching new products and expects them to drive its growth further. Moreover, it has expanded its Clinique and Lancome boutiques to 79 and 42 stores, respectively. Through these boutiques, Ulta is looking to take on department stores such as Macy’s (NYSE: M).

Catching up Offers Room for Growth

Macy’s is one of Ulta’s prime competitors with more than 840 stores, and offers both salon services and also sells perfume, cosmetics, etc., through its department stores. Ulta’s concerted store growth plan and its specialization in the beauty segment should enable it to stand toe to toe with Macy’s. However, as compared to Macy’s, Ulta is still pricey with a trailing P/E of 41.66 as against Macy’s 11.99.

However, Ulta is growing rapidly, and a forward P/E of 30.39 suggests that analysts also think the same. Ulta is in a better position to offer a better growth rate than Macy’s, which is a bigger player. Hence, I believe that Ulta’s expensiveness shouldn’t stand in the way if you are looking to initiate a long position as the company offers a lot of growth.

The Takeaway

Ulta Salon has delivered consistent growth this year, and this reflects in its stock price appreciation of around 56%. Its specialization in beauty products and services has held it in good stead, and has resulted in superior stock price performance as against both Macy’s and J.C. Penney (NYSE: JCP).

More than 300 J.C. Penney stores house Sephora, which happens to be one of the closest competitors of Ulta Salon. J.C. Penny has met with success with this store-within-a-store concept, but the company’s own flagging fortunes (a massive 26% plunge in same-store sales!) might not be able to help Sephora much and instead make things easy for Ulta.

Hence, Ulta’s specialization is one of its biggest strengths. Throw in an ever-increasing store count along with an impressive product portfolio that has led to market share gains, it becomes quite clear that we have a winner on our hands.  

TechJunk13 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend 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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