Ulta (ULTA): Why are we buying a retailer?

To call any retail high quality is difficult. The constant threat from Amazon, potential for price competition and margin pressure, foot traffic declines etc are very well known negative influences on retail’s business model.

However, we would argue that the beauty segment has attributes that lend itself to the omni model and that Ulta is a market share gainer in a reasonably good end market.

• The company has consistently reinvested back into the business, there are some positive trends, some negative, but in general it has a share winning format and high relevance with its customer base. We view it’s position as equivalent to HD or AZO etc, indeed any retailer / distributor that has evolved to stay relevant.

• Macro risks looks to be below average for Ulta, for example: Supply chain disruptions and COGS inflation have so far been limited.

• Beauty has historically been a resilient sector, suffering a modest decline in the 2008 /2009 and by about 3% in 2020.

The challenge is that there is very limited in-depth research to be done: We are not going to write about trends in beauty.... What we will say is this: newness is key to the segment. Newness sells. Newness reengages customers. After a period of lower newness in make-up, innovation accelerated and the future looks to be improving.

We believe consensus numbers are too low and valuation is sensible.

• Our EPS estimate for FY24 is 12% above consensus, mainly driven by higher growth rate expectations, despite a falling operating margin.

Potential Upside: $514 (+27%)

Sensible Downside: $366 (-10%)

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