Ulta Beauty Q1 Results: Queen of Cosmetics (NASDAQ: ULTA)

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In my first article on Ulta Beauty (NASDAQ:ULTA), I put in a hold recommendation on this and said investors should wait for a pullback before buying the stock. Since my April 8 recommendation, Ulta fell back into the $345-350 range before bouncing back after phenomenal Q1 results.

Data by YCharts

Last week, Ulta gained 22.8% and, as seen in the chart above, surged after beating earnings and, more importantly, raising expectations.

Huge Quarterly Earnings Report Beats Expectations, Raises Forecasts

Guide change (Ulta Q1 press release)

While on vacation for most of the past week, I was unable to address the SA community regarding Ulta’s withdrawal and buying opportunity as the stock reached the $340-$350 mark before earnings.

Summary of the thesis

To summarize the thesis of my original article, three key points made me initially buy ULTA stock.

  1. Solid and loyal clientele
  2. Growing number of stores and SSS
  3. Financials and stellar redemptions

Strong and resilient business model

Ulta’s earnings proved that the cosmetics business is very strong. Ulta posted EPS of $6.30 (beat $1.82) and revenue of $2.34 billion (beat $220 million), indicating strong growth in a challenging environment for many retailers. We can see through the 1-month stock price charts below comparing Ulta to direct and indirect competitors, that the beauty retailer has performed the best.

Data by YCharts

According to the company’s 10-Q:

Although we do not believe that inflation has had a significant impact on our financial situation or results of operations to date, continued inflationary pressure could adversely affect consumer spending and sales.

The quote above shows Ulta’s dominance and leadership in the cosmetic space. Plus, it shows that despite the retail challenges, they have truly cultivated a loyal following, a key thesis point in my previous article that led me to buy my first share of Ulta in early 2021.

Continue to rely on data and take advantage of trends

Through the addition of new brands and the expansion of existing brands, Ulta continues to expand its product line, resulting in increased comparable sales. CEO Dave Kimbell mentioned it in the company’s first quarter earnings call.

From a trend perspective, foundation, concealer, eyeliner and lipstick continue to show strong growth in composition. New brands such as Fenty Beauty, Ariana Grande’s REM Beauty and Treslúce, a mass-market cosmetics brand founded by Latin musician Becky G, contributed to growth in the quarter.

While new product launches from a wide range of brands, including Clinique, Lancôme, NARS, elf and NYX, also generated strong sales growth. Additionally, this quarter we expanded MAC to 233 additional stores and introduced CHANEL Beauté to 104 stores.

Ulta Beauty’s ability to carry the best brands on its shelves is a key source of its competitive advantage. As a leader in beauty, brands are somewhat dependent on Ulta’s retail distribution to market their products. The ability to sell big-name brands such as Ariana Grande, Becky G, and Kylie Jenner drives customer traffic and builds customer loyalty.

Loyalty rewards strong customer growth

Author created (Transcripts of SA income)

As shown in the chart above, Ulta continues to build customer loyalty through its rewards program, with over 37 million Ultamate Rewards members.

The target partnership is going well

In my previous article, Ulta’s partnership with Target (TGT) was a key enabler that had the potential to grow Ulta’s revenue. As the 8th largest US retailer generating over $100 billion in annual revenue, Target generates millions in foot traffic that will benefit Ulta.

In Ulta’s F’21 10-K it was mentioned that in the long run it was possible to have about 800 Ultas in the target locations. On the quarterly call, COO Kecia Steelman commented.

To date, we have 140 stores open to date. Were on track to open more than 250 stores with them this year, but we like what we see. When we engage a member in our Ultimate Rewards program, we find that they behave very similarly to our existing loyal members. When it comes to brands, Ulta Beauty works very closely with partners, with our brand partners on assortment, etc., but Target really owns the sales. We are therefore not free to comment on specific sales performance by brand at this time.

While Ulta can’t comment on the partnership’s sales-specific performance, it had only opened 100 stores by the end of F’21 and plans to open 250 by the end of the year (30% of its long-term objective). While it’s nice to assess some quantitative performance metrics, I think it’s safe to say the partnership is good for Ulta.

Why Ulta May Be Able To Withstand Inflation

The hottest topic affecting markets post-COVID has been inflation and its impact on US businesses. However, Ulta mentioned that inflation should not negatively impact its business. For a business to thrive during a time of inflation, it must have pricing power to pass the cost on to the consumer to maintain its margins.

Asked about the first quarter results, Kimball said units per transaction are actually flat on a yearly basis, indicating customers’ willingness to spend more per transaction.

the units per transaction were essentially flat year over year. So again, we’re seeing a lot of benefits from continuing what I would call a moderate promotional environment overall, coupled with the mix of brands that we have that have entered the assortment here over the course of Last year.

Promotional events such as 21 Days of Beauty combined with new brand launches are clearly driving Ulta customers to return to stores to buy more. Asked by analyst Korinne Wolfmeyer about any noticeable shift between mass brands and prestige brands in light of inflation, Kimball said there has been no significant shift in demand between the two. segments.

So far our customers are doing well and we are not seeing huge impacts. In fact, as I mentioned in the script, prestige makeup performed a bit better than mass makeup…

…one of the unique things that we believe is central to our model is the wide of our assortment, all price points, from mass to prestige, all categories, hair care and skin care, makeup and bath and fragrance. Thus, the ability to adjust and adapt to changing consumer needs has long been part of our model and has allowed us to manage any disruption in the market. But right now we are seeing strength in all aspects of our business

Plus, while many may think cosmetics aren’t a necessity despite strong sales, data shows that skin and hair care routines are still going strong. In the first quarter, skincare reported a strong double-digit sales mix, similar to the first quarter of last year.

Even though they are increasing the use of makeup, beauty enthusiasts are maintain their skincare routines. As a result, skincare recorded another quarter of strong double-digit sales, on top of strong double-digit growth in the first quarter of last year.

Moisturizers, eye serums and acne treatments continue to drive category growth in the quarter. We also saw strong growth in sunscreen and self-tanners, which drove consumers to increase their travel and social activities.

Huge gross margins and operating margins

Gross and operating margins (Tikr)

The graph above shows ULTA’s ability to steadily increase its operating margin (green line in the graph) and maintain its strong gross margin of 40% (blue line) in the first quarter of 2022.

Commitment to redemptions

As Omaha Warren’s Oracle Buffet points out:

The companies in which we have our largest investments have all engaged in important Stock redeem at times when large gaps existed between price and value.

As shown in the second image in this article above, Ulta has committed $900 million to buy back stock for F’22. In the first quarter, Ulta repurchased 332,000 shares at a price of $132.8 million, with an average cost per share of $400. Although $132.8 million is not a important buyout, it proves that Ulta’s management believes in the stock and is focused on reducing the number of shares outstanding to drive shareholder returns.

Stock Buybacks, Redemptions, Capital Allocation, Warren Buffet

Author created (Ulta 10-K (2012-2021))

The chart above further illustrates Ulta’s strong history of excess capital allocation, consistently reducing the number of diluted shares since 2014. The chart below shows Ulta’s 10-year EPS, which will continue to be supercharged via buyouts.

Tremendous EPS growth

EPS trend (Ulta 10-K)

The high end of Ulta’s EPS forecast ($20.10) implies a strong 12% YoY increase for F’22.


Despite Ulta’s price hike, it still trades at a very reasonable 20x price. While this figure is higher than other retailers, Ulta’s industry leadership and above-average margins justify its higher multiple against the peer group.

Data by YCharts

As the chart above shows, Ulta’s P/E ratio is trading at around 20x, well below its 5-year average. While Ulta is by no means cheap, it really is a wonderful company at a fair price. Although the current macro environment may still cause short term headwinds, Ulta still has strong fundamentals, a high quality business model and a reasonable earnings multiple.

Solid company

Overall, the first quarter proved that Ulta is in fact the queen of cosmetics and beauty as a whole. With record numbers, the onboarding of new brands, and its continued commitment to buybacks, I’ll raise my recommendation on Ulta to a buy. Yes, I know…at $401 last month, I said it was a “Hold” and investors should wait for a pullback. The pullback actually happened, but Ulta rebounded immediately, now sitting just north of $400 as of this writing.

Ultimately, Ulta is a wonderful company with extremely loyal customers sporting big brands in the mass and prestige categories. With its top-notch loyalty program and ability to adapt to customer preferences, Ulta is an outstanding addition to its portfolio.

Donovan B. Sanford