A beautiful stock: Ulta Salon, Cosmetics & Fragrance Inc.

By Poroma Pant

Enjoying a significant rise in its stock price in a quivering market, ULTA Salon, Cosmetics & Fragrance Inc. attributes its winning numbers to an ingenious six-part strategy.

The beauty of the earnings and overall performance of the Bolingbrook-based chain has enabled it to capture the hearts of analysts. Commencing this year with a bang, ULTA’s stock peaked at $185.98 on Jan 12., closing at $185.62.

ULTA Salon, Cosmetics & Fragrance Inc. stock price

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Between Sep’15 & Jan’16 ULTA’s stock price has increased significantly.

The company’s rapid rise to the top, likened to the growth of Silicon Valley start-ups, has generated enough buzz to be certified as “Amazon-proof” by the Wall Street Journal.

Despite strong competition from retail giant Amazon Inc. ULTA has  successfully established itself as a beauty destination distinguished from competitors including LVMH Inc.’s globally known Sephora.

Key aspects of its business model includes earning a popular tagline as a ‘One Stop Shopping Experience’ presenting over 20,000 products, an unusual blend of “prestige” and “mass” items. The ULTA experience is enhanced for consumers as all stores come equipped with full-service salons. ULTA also prides itself in focusing heavily on Customer Relationship Management, driving customer loyalty. Off-mall location plays an integral part of the business model as its stores are approximately 10,000 square feet and are located in high traffic locations. This distinction, the company believes, improves consumer satisfaction in comparison to tightly packed in-mall stores like Sephora.

In a conference call following exceptional third quarter earnings, Chief Executive Officer Mary Dillon said, “Strong traffic and healthy new store productivity drove the top line leading to better than expected earnings growth.”

ULTA saw a 22 percent increase in net sales to $910.7 million from $745.7 million in the third quarter of  2014. Same-store sales for the quarter increased by 13 percent compared with 9.5 percent the previous year.

A “Home Depot” of beauty supplies for women, under the leadership of Dilon the company claims an enhanced guest loyalty program, one of the six imperative strategies credited for its success.

The program has 17 million active users, up 20 percent from last year including a 56 percent increase in reactivation of inactive members. Dilon said in the conference call, “We believe our efforts to increase brand awareness through advertising are also contributing to the acceleration in new loyalty member acquisition.”

Driving business through an increasingly personalized Customer Relationship Management, using targeted emails, ULTA is on track to distribute more than 4 million personalized samples this year.

“How we bring it all together is what sets us apart and what’s driving our consistent market share gains,” Dillon said. Apart from personalization and product innovation, the company’s aim to deliver a premium in-store salon experiences and ensure e-commerce growth has had the desired effect.

An increase of 20 percent in its third quarter net income to $71.1 million is striking at a time when most chain retailers are running uphill.

ULTA is expected to report net sales of $1.2 billion in its fourth quarter compared with $1.04 billion a year earlier. Earnings per share for the fourth quarter are estimated at $1.53, a sharp increase from $1.27.

With a universal stock rating of buy, ULTA outperforms its peers, according to analysts who expect faster growth and sales than the competitors.

ULTA’s price earning ratio is a lofty 38.23, twice than the S&P 500 stocks average of 19.72. Simeon Siegel of Nomura Securities International Inc. said in an e-mail, “The market pressure has weighed on high multiple stocks (ULTA being a high multiple stock). However, we continue to expect ongoing fundamental strength.”

Analysts of the Cowen Group Inc. said in a report last month, “We believe an elevated multiple is warranted for ULTA, as we believe in management’s well-outlined plans to continue to drive growth, gain market share, and create compelling shareholder value.”

Oliver Chen of the Cowen Group said in report following third quarter earnings, “In our view, ULTA’s unique shopping format is a differentiated crowd pleaser which keeps loyal customers coming back. We believe ULTA is well positioned to gain share & sustainably grow EPS at 20%+ on its pipeline of unique brands, leading loyalty program, & shifting customer preference for specialty beauty.”

Afsah Bhutta, 23, a Pakistani national who travels frequently to the U.S and makes a point of stopping at ULTA , stated that she prefers ULTA over Sephora, citing superior customer service and its `dual function as a retailer of premium and mass products.

“Another reason I love ULTA is that they always have deals or coupons to use on makeup. All the beauty gurus promote them which is why you have to be quick to grab new stuff there. It’s always gone in a flash!” she added.

Photo at top: Ulta Beauty stands tall in Downtown Chicago’s State St. (Poroma Pant/Medill)