Explosive Ulta Beauty will open 100 more stores


By Beixi Xu

Gina Torres, a Chicagoan who works in Home Depot, just finished shopping in Ulta Beauty’s North Avenue store.​

“I am a fan of the store, and I get my cosmetics here, today I got my new eyeliner,” said Torres. “I live not far from here, only three to five miles. I usually drive here, and the parking is free in this area.”

Based in Bolingbrook, Ulta Beauty Inc. is the largest national beauty retailer featuring cosmetics, fragrances, skin and hair care products and salon services. As of Jan. 28, 2017, Ulta Beauty operates 974 retail stores across 48 states and offers more than 20,000 products from over 500 well-established and emerging beauty brands through its website.

Salon service in Ulta Beauty.

Ulta Beauty earned $409.8 million, or $6.52 per diluted share, on sales of $4.85 billion in 2016. Analysts estimate this year’s EPS at $8.02, as surveyed by Bloomberg. One analyst, Mark S. Astrachan of Stifel Nicolaus, estimates current-year revenues of $5.92 billion. The company predicts an EPS increase in the low twenties, acknowledging that EPS will be boosted by repurchasing $300 million of stock.

The company stated in a recent press release that it plans to offer 700 additional brands of Lancôme and MAC this year.

“We believe MAC is a major win since it traditionally sells in free-standing stores and department stores and Sephora doesn’t carry this brand, this will raises Ulta’s profile with millennials, and reinforce our view that Ulta’s share capture from department stores remains early,” wrote Christopher Horvers, senior analyst at J.P. Morgan, in a note.

Horvers has an “overweight” rating on Ulta Beauty and a $310 target price.

Ulta Beauty’s stock has been on the rise. When the market closed Wednesday, shares were $287.78, only down 0.3 percent from the peak of $288.59 on March. 13, 2017.

Goldman Sachs analyst Matthew Fassler on March 10 raised his target price to $311 from $290. Fassler has a “neutral” rating on Ulta.

“We still see a promising SSS trajectory, with the addition of more prestige brands likely to aid Ulta’s own brand standing and sales momentum over the next one to two years,” wrote Fassler in a note.

The stock increased 54 percent since its 52-week low of $188.60 on March 16, 2016.

Analysts are optimistic about Ulta Beauty’s stock performance this year. Of the 24 analysts surveyed by Bloomberg, 10 give Ulta Beauty a “hold” rating and 14 give “buy rating. The 12-month consensus target stock price is $302.05.

Ulta Beauty’s price-to-earnings ratio for the trailing 12 months currently stands at 43.03, compared with an industry average of 44.1 as reported by Yahoo Finance, and 26.65 for the Standard & Poor’s 500 Index stocks.

The company is expecting to achieve comparable sales growth of approximately 8 percent to 10 percent this year, and e-commerce sales to grow in the 40 percent range.

“We see meaningful upside to the comparable forecast given continued momentum across all channels, new brands and further benefits from an expanding loyalty program,” wrote Simeon Gutman, equity analyst at Morgan Stanley, in a note. “However, we have been overly sensitive to valuation, because any comparable slip could cause multiple compressions.”

Gutman has an “equal-weight” rating on Ulta Beauty and a $300 target price.

Unlike other large retailers, Ulta Beauty keeps opening new stores. It plans to open approximately 100 net new stores in 2017, including a new store on Chicago’s Michigan Avenue Magnificent Mile this summer.

Ulta’s ambitious new-store plan for this year is consistent with its previous pace of expansion, and is seen as creating opportunity to gain market share and profits as other retail chains contract.

The new stores, said Mary Dillon, Ulta Beauty’s CEO on a March 9 conference call with analysts, will include “a handful of stores that are not in our typical suburban locations, and which will require more capital and higher rent.”

Dave Kimbell, chief merchandising and marketing officer, added, “we’re certainly looking at making sure that these stores are efficient and effective.”

“We went to a place where we felt most comfortable, ” commented Chief Financial Officer Scott Settersten, “a neighborhood feel there with a lot of traffic.”

Despite its success, Ulta Beauty still faces challenges.

In a December 2016 SEC filing the company cited a risk that opening of new stores could strain company resources and have a material adverse effect on its business and financial performance.

Stifel analyst Mark Astrachan wrote in his note that his target price risks include greater-than-anticipated store expansion. He has a “hold” rating on Ulta Beauty and a target price of $290.

Compared with other large cosmetic companies such as Sephora, Ulta Beauty still faces challenges to improve customer loyalty and drive new brands to meet customers’ expectation.

Narisa Kapinos, a 28-year-old Chicago high school teacher emerging from Ulta Beauty on North Avenue, said she actually doesn’t like Ulta Beauty, preferring Sephora because it has “better products and better rewards.”

“I shopped here several years ago, but I would only come here for hair care products now, because Sephora doesn’t sell hair care products,” said Kapinos.

“I would suggest that Ulta should improve their reward system, like their loyalty. They sent coupons home every month, but it’s only like $3.50 off your purchase of $10 or $15. Whereas at Sephora, you get like free samples and you still get lot more perks and a lot more free stuff when you purchase things there,” Kapinos added.

​Photo at top: Ulta Beauty provides services to customers. (Beixi Xu/MEDILL)​