Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: KCLarkin on August 30, 2019, 10:25:16 AM

Title: ULTA - Ulta Beauty
Post by: KCLarkin on August 30, 2019, 10:25:16 AM
"Ulta Beauty is the largest U.S. beauty retailer and the premier beauty destination for cosmetics, fragrance, skin care products, hair care products and salon services."

Over the past 10 years, Ulta has grown at the following rates (per share Valueline figures):
- Sales: 18.5%
- Cash flow: 41%
- EPS: 34%

Over the past 5 years, it has slowed a bit:
- Sales: 22.5%
- Cash Flow: 26.5%
- EPS: 27%

ROIC has climbed steadily and is now 33%

Ulta shares are down almost 30% today after missing Q2 2019 earnings and lowering 2019 guidance. They are now guiding:
- 9-12% sales growth
- 4-6% same store sales (mostly traffic)
- $11.86 to $12.06 EPS
- EPS growth is 9% at the mid-point

Shares are currently selling for $239
- 22x 2018 EPS
- 20x 2019e (midpoint)

Ulta has no debt (other than operating leases which are now on balance sheet)
Ulta is now using a significant portion of it's net income to repurchase shares (over 100% YTD)
Despite the high growth, FCF seems extremely high (97% in 2018)

I just started looking into Ulta this afternoon, but it looks like an incredible business selling at a modest premium to the market. Am I missing anything?

Edit: Typo in original. Comps are mostly transactions not ticket.
Title: Re: ULTA - Ulta Beauty
Post by: Gregmal on August 30, 2019, 10:37:47 AM
Haven't you heard? We're having a recession!

Let people give away their stocks and then watch them complain for the next decade about how everything is too expensive...
Title: Re: ULTA - Ulta Beauty
Post by: roark33 on August 30, 2019, 10:44:45 AM
Value investors are typically not great "retail" investors, once the customers move on, they seldom come back, but you have value investors looking at past financials and thinking, well, if the company does 80% (or whatever number) of what it did in the past 5 years, this will be a great investment.  My two cents.  Not saying this is perfectly applicable to ULTA (I looked at it this morning also), but retail companies are typically something that growth investors do much better at than value investors. 
Title: Re: ULTA - Ulta Beauty
Post by: KCLarkin on August 30, 2019, 10:55:27 AM
Value investors are typically not great "retail" investors, once the customers move on, they seldom come back, but you have value investors looking at past financials and thinking, well, if the company does 80% (or whatever number) of what it did in the past 5 years, this will be a great investment.  My two cents.  Not saying this is perfectly applicable to ULTA (I looked at it this morning also), but retail companies are typically something that growth investors do much better at than value investors.

I tend to agree with you, but Ulta is still growing same store sales faster than GDP. I tend to avoid retail. But I've seen a couple good ones sell-off temporarily in the last few years. Costco, Lulu, and TSCO come to mind. Though I only bought Lulu. I'm very tempted to buy a starter here. Someone talk me off the ledge...
Title: Re: ULTA - Ulta Beauty
Post by: peterHK on August 30, 2019, 12:29:34 PM
Own the brands, L'Oreal, EL, LVMH etc. EM and travel is where the growth is at, not the US.
Title: Re: ULTA - Ulta Beauty
Post by: KCLarkin on August 30, 2019, 12:36:22 PM
Own the brands, L'Oreal, EL, LVMH etc. EM and travel is where the growth is at, not the US.

Not familiar with the space, but why are existing brands not going to lose market share to emerging brands like Kylie and private label brands?

The brands also seem to be trading at a significant premium.
Title: Re: ULTA - Ulta Beauty
Post by: peterHK on August 30, 2019, 12:39:55 PM
Own the brands, L'Oreal, EL, LVMH etc. EM and travel is where the growth is at, not the US.

Not familiar with the space, but why are existing brands not going to lose market share to emerging brands like Kylie and private label brands?

The brands also seem to be trading at a significant premium.

Because those brands don't exist in China. They want the exclusivity of EL/LVMH etc. EL EM sales grew 30% last year and it's something like 30% of their business.
Title: Re: ULTA - Ulta Beauty
Post by: KCLarkin on August 30, 2019, 12:54:26 PM
Because those brands don't exist in China. They want the exclusivity of EL/LVMH etc. EL EM sales grew 30% last year and it's something like 30% of their business.

Or probably more accurately, the emerging brands have and will be purchased by EL or LVMH.
Title: Re: ULTA - Ulta Beauty
Post by: KCLarkin on August 30, 2019, 01:09:54 PM
I purchased a starter position (2.5%) in ULTA. Ulta continues to gain market share within one of the most attractive retail segments. The strategy of offering both mass market and premium categories will allow it to continue to win against Amazon and Sephora. And specialty will continue to win share from department stores, etc.

Current weakness in cosmetics is related to macro product cycles. Specifically, the weakness is caused by very strong product cycles in recent years. Barring a recession, I expect the market to resume modest growth once it works through this cycle. Ulta will continue to gain market share, open new stores, and gain operating leverage.

Ulta is also just beginning international expansion, so there is a long runway for potential growth.

If this gets below $200, it is a no-brainer.
Title: Re: ULTA - Ulta Beauty
Post by: Spekulatius on August 30, 2019, 03:30:02 PM
I donít know, the CEO didnít seem that confident in the latest earnings CC. I feel they make have ridden some fads recently (those upstart brands, that failed to deliver) or perhaps they are the fad. I donít understand the moat with their business (no surprise as a middle aged male).
Title: Re: ULTA - Ulta Beauty
Post by: KCLarkin on August 30, 2019, 06:41:55 PM
I donít know, the CEO didnít seem that confident in the latest earnings CC. I feel they make have ridden some fads recently (those upstart brands, that failed to deliver) or perhaps they are the fad. I donít understand the moat with their business (no surprise as a middle aged male).

With retailers, I find moats to be a bit mushy. But there are clearly retailers who exhibit moat-like qualities. One surprising thing about Ulta is that it has more active rewards members than Starbucks. If you look at their growth this quarter and the negative growth at the brands, it is pretty clear that Ulta is still taking market share.

But anyway, I think this is a good starting point:

Quote
Ulta Beautyís success is rooted in a single consumer insight that the founders uncovered. Like all great insights, it is simple but meaningful: Most consumers shop for and buy beauty products across price points, across categories, and across brands. They are looking to curate their own collection. But the beauty industry has always beenóand largely remainsóset up to separate products by price and category

Quote
What we find is that this engagement isnít about demographics. Rather, there is a segment of consumers that sees beauty as a joy: itís fun, itís a passion, itís an escape. By tailoring our experience in a way that helps this behavior come to life, weíve been able to have success.

Source:
https://insight.kellogg.northwestern.edu/article/the-secret-to-ulta-beautys-success-joy/amp
Title: Re: ULTA - Ulta Beauty
Post by: Spekulatius on August 31, 2019, 05:09:35 AM
I donít know, the CEO didnít seem that confident in the latest earnings CC. I feel they make have ridden some fads recently (those upstart brands, that failed to deliver) or perhaps they are the fad. I donít understand the moat with their business (no surprise as a middle aged male).

With retailers, I find moats to be a bit mushy. But there are clearly retailers who exhibit moat-like qualities. One surprising thing about Ulta is that it has more active rewards members than Starbucks. If you look at their growth this quarter and the negative growth at the brands, it is pretty clear that Ulta is still taking market share.

But anyway, I think this is a good starting point:

Quote
Ulta Beautyís success is rooted in a single consumer insight that the founders uncovered. Like all great insights, it is simple but meaningful: Most consumers shop for and buy beauty products across price points, across categories, and across brands. They are looking to curate their own collection. But the beauty industry has always beenóand largely remainsóset up to separate products by price and category

Quote
What we find is that this engagement isnít about demographics. Rather, there is a segment of consumers that sees beauty as a joy: itís fun, itís a passion, itís an escape. By tailoring our experience in a way that helps this behavior come to life, weíve been able to have success.

Source:
https://insight.kellogg.northwestern.edu/article/the-secret-to-ulta-beautys-success-joy/amp

Thanks, great article and really helps with understanding what ULTA is about. It seem sort of e-commerce resilient this way.

Another thought is that the increasing self awareness regarding looks related to Instagram and other social media platforms in particular is helping ULTA or similar companies.
Title: Re: ULTA - Ulta Beauty
Post by: KCLarkin on August 31, 2019, 06:12:30 AM
Just going through the LíOreal transcript and they reinforce that this is an industry-wide issue not Ulta-specific:

Quote
In North America, if I understand your question itís about the different channels for luxury. Whatís happening to us is the same that whatís happening to the market in general. Department stores are pretty tough. And specialty retailers like Sephora and Ulta are growing very well. And so we are Ė with this retailers we are a very important partner of Ulta, a very important partner too of Sephora.

Quote
So when the makeup market is strongly growing, really itís a tailwind. When the makeup market is more difficult, like it is today after these four or five years of boom of the makeup, itís more a headwind.
Title: Re: ULTA - Ulta Beauty
Post by: KCLarkin on September 01, 2019, 07:09:43 AM
Another thought is that the increasing self awareness regarding looks related to Instagram and other social media platforms in particular is helping ULTA or similar companies.

This is actually the trend that is working against makeup industry right now. There was a very strong 4 or 5 year makeup-heavy cycle driven by social media. But the trend now seems to be towards more natural makeup (e.g. VSCO girls).
Title: Re: ULTA - Ulta Beauty
Post by: Spekulatius on September 01, 2019, 09:07:36 AM
Another thought is that the increasing self awareness regarding looks related to Instagram and other social media platforms in particular is helping ULTA or similar companies.

This is actually the trend that is working against makeup industry right now. There was a very strong 4 or 5 year makeup-heavy cycle driven by social media. But the trend now seems to be towards more natural makeup (e.g. VSCO girls).

I am so out of touch with these trends that I had to google half the terms (VSCO, Tik Tok,  scrunchie). Based on the pics , I think the 70ís make a comeback. Definitely far out of my circle of competence, although I do know a thing or two about the 70ís.
Title: Re: ULTA - Ulta Beauty
Post by: SHDL on September 01, 2019, 09:15:21 AM
These are things I tend to worry a lot about when looking at retailers.  What if this movement toward lighter make up turns out to be not merely a cycle but a secular trend? 
Title: Re: ULTA - Ulta Beauty
Post by: Jurgis on September 01, 2019, 11:02:57 AM
Well, I don't use makeup, so it's definitely a secular trend.  8)  ::)
Title: Re: ULTA - Ulta Beauty
Post by: SHDL on September 01, 2019, 11:30:51 AM
Well, I don't use makeup, so it's definitely a secular trend.  8)  ::)

I donít always scuttlebutt but when I do I do it with n=1.   8)
Title: Re: ULTA - Ulta Beauty
Post by: roark33 on September 03, 2019, 08:53:10 AM
As if right on cue, ULTA written up on VIC.  Value investors love a good fallen growth story.  There is a lot of air between growth and value and when it comes to retailers, I am not sure that gap is really ever filled. 
Title: Re: ULTA - Ulta Beauty
Post by: Broeb22 on September 03, 2019, 11:41:40 AM
Well, I don't use makeup, so it's definitely a secular trend.  8)  ::)

You're just untapped TAM for ULTA.
Title: Re: ULTA - Ulta Beauty
Post by: chompsterama on September 03, 2019, 12:47:49 PM
What's this business got that's special? 

Yes, they've ridden a huge wave of makeup/hair/beauty exploding and sometimes being in the right place is all it takes for a while.  But management (as per the most recent CC) is admitting that the tide is turning and the wave shrinking.  I don't know they have anything special beyond that.  Maybe they do. 

Here's the thinking:  The business sells mostly third party products and caters to makeup and hair (both styles of which don't change often - most people keep their makeup/hair routine for years once they find what works).  Once a customer finds their favorite dermalogica, clairol, elf, clinique products why should they come back to Ulta?  There are zero switching costs and the business sells almost nothing proprietary.  I mean I like my local tennis shop (that isn't around anymore), but I am not paying $6/sleeve of Penn balls when Walmart or Amazon sell them for $2.50. 

In the end, the lowest cost seller will win the business because they are selling someone else's stuff.  I doubt Ulta will be the lowest cost over the long-run.  How can they be? 

Title: Re: ULTA - Ulta Beauty
Post by: BG2008 on September 03, 2019, 12:55:53 PM
What's this business got that's special? 

Yes, they've ridden a huge wave of makeup/hair/beauty exploding and sometimes being in the right place is all it takes for a while.  But management (as per the most recent CC) is admitting that the tide is turning and the wave shrinking.  I don't know they have anything special beyond that.  Maybe they do. 

Here's the thinking:  The business sells mostly third party products and caters to makeup and hair (both styles of which don't change often - most people keep their makeup/hair routine for years once they find what works).  Once a customer finds their favorite dermalogica, clairol, elf, clinique products why should they come back to Ulta?  There are zero switching costs and the business sells almost nothing proprietary.  I mean I like my local tennis shop (that isn't around anymore), but I am not paying $6/sleeve of Penn balls when Walmart or Amazon sell them for $2.50. 

In the end, the lowest cost seller will win the business because they are selling someone else's stuff.  I doubt Ulta will be the lowest cost over the long-run.  How can they be?

Dude,

Have you watch any of the make up tutorials on Youtube?  There are non-binary/gay men/young boys who make a full time living off tutoring women on applying make ups.  The ability of these individuals to make a living is due to the fact that there is a ton of females who are wearing a lot of make up. 

10-15 years ago, I may look at an attractive black female and notice the bumps and imperfections in her skin.  In the last 5 years, I have notice a lot more African American females who have great contours and very smooth skins.  They look glamorous and I am sure that the upkeep is expensive.  But who wants to show bumpy skin once they have a taste of that smooth silky skin? 

Have you bought cosmetics?  It's an experience!  I'm not talking about a guy who goes to the pharmacy and look at Nivea shave cream vs Harry's.  Kylie Jenner and Rhianna have over 20 different skin tones.  Rhianna has an albino cosmetic.  It's about inclusivity and body positivity.  We all think it's bullshit.  Try to convince me to pay $10,000 for a handbag or $250,000 for a Ferrari.  No way in hell.  But there are buyers out there for it.  It is nice to go to a cosmetic store and try out different shades, tones, and foundations.  It's an experience.   

No dog in this fight.  But just like to rant. 
Title: Re: ULTA - Ulta Beauty
Post by: frank87 on September 03, 2019, 01:01:07 PM
To pile on the tennis ball analogy - you know what tennis ball and what brand you like to buy whereas women like to experiment and try out new looks. It totally makes sense why the experiential aspect of cosmetics is so valuable.
Title: Re: ULTA - Ulta Beauty
Post by: BG2008 on September 03, 2019, 01:13:10 PM
To pile on the tennis ball analogy - you know what tennis ball and what brand you like to buy whereas women like to experiment and try out new looks. It totally makes sense why the experiential aspect of cosmetics is so valuable.

To further pile on the tennis ball analogy - you know what tennis ball and what brand you like to buy because "at some point, you played tennis and tried different balls on different courts and you wind up choosing certain types of balls for performance."  Ulta is that playground to chose.  Keep in mind that the world keep making 15 years old girls every year.  Every year, they start using make up and there is an experimentation process.  Back when I was 18, I thought "who wouldn't drink Budlight?"  I thought that way because I have seen hundreds of football games on TV and I have seen thousands of Budlight ads.  At the time, I took it for granted.  But there is a customer acquisition cost to every Bud drinker.  I was slowly brainwashed and I thought I was just getting a free football game on TV. 
Title: Re: ULTA - Ulta Beauty
Post by: Gregmal on September 03, 2019, 01:37:47 PM
To pile on the tennis ball analogy - you know what tennis ball and what brand you like to buy whereas women like to experiment and try out new looks. It totally makes sense why the experiential aspect of cosmetics is so valuable.

To further pile on the tennis ball analogy - you know what tennis ball and what brand you like to buy because "at some point, you played tennis and tried different balls on different courts and you wind up choosing certain types of balls for performance."  Ulta is that playground to chose.  Keep in mind that the world keep making 15 years old girls every year.  Every year, they start using make up and there is an experimentation process.  Back when I was 18, I thought "who wouldn't drink Budlight?"  I thought that way because I have seen hundreds of football games on TV and I have seen thousands of Budlight ads.  At the time, I took it for granted.  But there is a customer acquisition cost to every Bud drinker.  I was slowly brainwashed and I thought I was just getting a free football game on TV.

I'm in my 30's and still think that. Although it took me a while to move on from Natty Light, the original hard seltzer, before hard seltzer was a thing.
Title: Re: ULTA - Ulta Beauty
Post by: chompsterama on September 03, 2019, 02:05:46 PM
What's this business got that's special? 

Yes, they've ridden a huge wave of makeup/hair/beauty exploding and sometimes being in the right place is all it takes for a while.  But management (as per the most recent CC) is admitting that the tide is turning and the wave shrinking.  I don't know they have anything special beyond that.  Maybe they do. 

Here's the thinking:  The business sells mostly third party products and caters to makeup and hair (both styles of which don't change often - most people keep their makeup/hair routine for years once they find what works).  Once a customer finds their favorite dermalogica, clairol, elf, clinique products why should they come back to Ulta?  There are zero switching costs and the business sells almost nothing proprietary.  I mean I like my local tennis shop (that isn't around anymore), but I am not paying $6/sleeve of Penn balls when Walmart or Amazon sell them for $2.50. 

In the end, the lowest cost seller will win the business because they are selling someone else's stuff.  I doubt Ulta will be the lowest cost over the long-run.  How can they be?

Dude,

Have you watch any of the make up tutorials on Youtube?  There are non-binary/gay men/young boys who make a full time living off tutoring women on applying make ups.  The ability of these individuals to make a living is due to the fact that there is a ton of females who are wearing a lot of make up. 

10-15 years ago, I may look at an attractive black female and notice the bumps and imperfections in her skin.  In the last 5 years, I have notice a lot more African American females who have great contours and very smooth skins.  They look glamorous and I am sure that the upkeep is expensive.  But who wants to show bumpy skin once they have a taste of that smooth silky skin? 

Have you bought cosmetics?  It's an experience!  I'm not talking about a guy who goes to the pharmacy and look at Nivea shave cream vs Harry's.  Kylie Jenner and Rhianna have over 20 different skin tones.  Rhianna has an albino cosmetic.  It's about inclusivity and body positivity.  We all think it's bullshit.  Try to convince me to pay $10,000 for a handbag or $250,000 for a Ferrari.  No way in hell.  But there are buyers out there for it.  It is nice to go to a cosmetic store and try out different shades, tones, and foundations.  It's an experience.   

No dog in this fight.  But just like to rant.

I appreciate your optimism for youtube and makeup tutorials, Dude.  It's obvious this strange phenom HAS been huge and has probably driven consumers to try then buy products at ULTA.  My point is that management thinks that wave is shrinking.  And going with the tennis ball analogy, doesn't that mean that ULTA could have a negative selection bias?  When someone wants to experiment every few years with changing their makeup they go to Ulta and get a demo, ULTA fronts the cost for the demo and product and MUA then the customer buys their tennis balls from the cheapest seller thanks to ULTA helping them find which ball they like best?  I just can't sort out why ULTA would be that sticky six months after I've found my ideal dermologica product.  I'm going to Google to find whoever will sell it to me the cheapest.   
Title: Re: ULTA - Ulta Beauty
Post by: BG2008 on September 03, 2019, 02:29:43 PM
What's this business got that's special? 

Yes, they've ridden a huge wave of makeup/hair/beauty exploding and sometimes being in the right place is all it takes for a while.  But management (as per the most recent CC) is admitting that the tide is turning and the wave shrinking.  I don't know they have anything special beyond that.  Maybe they do. 

Here's the thinking:  The business sells mostly third party products and caters to makeup and hair (both styles of which don't change often - most people keep their makeup/hair routine for years once they find what works).  Once a customer finds their favorite dermalogica, clairol, elf, clinique products why should they come back to Ulta?  There are zero switching costs and the business sells almost nothing proprietary.  I mean I like my local tennis shop (that isn't around anymore), but I am not paying $6/sleeve of Penn balls when Walmart or Amazon sell them for $2.50. 

In the end, the lowest cost seller will win the business because they are selling someone else's stuff.  I doubt Ulta will be the lowest cost over the long-run.  How can they be?

Dude,

Have you watch any of the make up tutorials on Youtube?  There are non-binary/gay men/young boys who make a full time living off tutoring women on applying make ups.  The ability of these individuals to make a living is due to the fact that there is a ton of females who are wearing a lot of make up. 

10-15 years ago, I may look at an attractive black female and notice the bumps and imperfections in her skin.  In the last 5 years, I have notice a lot more African American females who have great contours and very smooth skins.  They look glamorous and I am sure that the upkeep is expensive.  But who wants to show bumpy skin once they have a taste of that smooth silky skin? 

Have you bought cosmetics?  It's an experience!  I'm not talking about a guy who goes to the pharmacy and look at Nivea shave cream vs Harry's.  Kylie Jenner and Rhianna have over 20 different skin tones.  Rhianna has an albino cosmetic.  It's about inclusivity and body positivity.  We all think it's bullshit.  Try to convince me to pay $10,000 for a handbag or $250,000 for a Ferrari.  No way in hell.  But there are buyers out there for it.  It is nice to go to a cosmetic store and try out different shades, tones, and foundations.  It's an experience.   

No dog in this fight.  But just like to rant.

I appreciate your optimism for youtube and makeup tutorials, Dude.  It's obvious this strange phenom HAS been huge and has probably driven consumers to try then buy products at ULTA.  My point is that management thinks that wave is shrinking.  And going with the tennis ball analogy, doesn't that mean that ULTA could have a negative selection bias?  When someone wants to experiment every few years with changing their makeup they go to Ulta and get a demo, ULTA fronts the cost for the demo and product and MUA then the customer buys their tennis balls from the cheapest seller thanks to ULTA helping them find which ball they like best?  I just can't sort out why ULTA would be that sticky six months after I've found my ideal dermologica product.  I'm going to Google to find whoever will sell it to me the cheapest.

This is such a man's way of thinking...men seeks efficiency and lowest price...women seeks adventure and discovery and all over again
Title: Re: ULTA - Ulta Beauty
Post by: KCLarkin on September 03, 2019, 06:32:56 PM
What's this business got that's special? 

Yes, they've ridden a huge wave of makeup/hair/beauty exploding and sometimes being in the right place is all it takes for a while.  But management (as per the most recent CC) is admitting that the tide is turning and the wave shrinking.  I don't know they have anything special beyond that.  Maybe they do. 

Here's the thinking:  The business sells mostly third party products and caters to makeup and hair (both styles of which don't change often - most people keep their makeup/hair routine for years once they find what works).  Once a customer finds their favorite dermalogica, clairol, elf, clinique products why should they come back to Ulta?  There are zero switching costs and the business sells almost nothing proprietary.  I mean I like my local tennis shop (that isn't around anymore), but I am not paying $6/sleeve of Penn balls when Walmart or Amazon sell them for $2.50. 

In the end, the lowest cost seller will win the business because they are selling someone else's stuff.  I doubt Ulta will be the lowest cost over the long-run.  How can they be?

They have twice as many rewards members as Starbucks. Maybe there is more to this business than tennis balls?
Title: Re: ULTA - Ulta Beauty
Post by: BG2008 on September 03, 2019, 09:10:38 PM
I talked to my wife at dinner tonight about Ulta and cosmetics.  I told her about the tennis ball analogy and she told me that girls will own over one hundred lipsticks.  I asked her why?  She said "they brands will market them as limited color, limited edition, limited tone, etc"  She says that they are available all the time. But girls are "gatherers"  and FOMO is very real when it comes to acquiring that supposedly limited edition lipstick. 

I don't get it.  It doesn't make sense.  But why do people spend $13 on a pack of smoke?  But people do it. 
Title: Re: ULTA - Ulta Beauty
Post by: writser on September 04, 2019, 09:03:01 AM
This is such a man's way of thinking...men seeks efficiency and lowest price...women seeks adventure and discovery and all over again

That is such a man's way of thinking..
Title: Re: ULTA - Ulta Beauty
Post by: BG2008 on September 04, 2019, 02:12:54 PM
This is such a man's way of thinking...men seeks efficiency and lowest price...women seeks adventure and discovery and all over again

That is such a man's way of thinking..

You got me good
Title: Re: ULTA - Ulta Beauty
Post by: wescobrk on September 04, 2019, 07:39:27 PM
down to $227 a share in after hours...
Title: Re: ULTA - Ulta Beauty
Post by: KCLarkin on September 11, 2019, 10:36:45 AM
Own the brands, L'Oreal, EL, LVMH etc. EM and travel is where the growth is at, not the US.

Thanks for this. I am warming up to the brands, but not willing to pay current prices. I recently watched a Fundsmith video where they named L'Oreal as the one stock in the universe they would own forever. Not sure I agree, but they made a compelling argument.

I'm currently reading a phenomenal interview with Bill Stewart in Graham & Dodsville:
https://www8.gsb.columbia.edu/valueinvesting/sites/valueinvesting/files/Graham%20&%20Doddsville_Issue%2036_vF.pdf

One of the things that struck me from the interview is how many phenomenal growth stocks over the years have been retailers: Home Depot, CVS, Walmart, Costco, TJX, Dollar General, Tractor Supply, Lululemon, Alimentation Couche-Tard, Ulta come immediately to mind. Over most time periods, several of the best performing stocks are retailers. For example, Kiplingers has a list of the top performing S&P 500 stocks over a 50 year period. Four of the top fifteen are retailers:

4. Dollar General
7. Lowe's
13. Walgreen's
15. TJX

Notably, there aren't many company's from the "growth" sectors like technology and healthcare. ADP at number 10 was the closest to a "technology" company in the top 15. And only two healthcare companies (Abbott and Medtronic) made the top 15.

There is something about retail (insert past performance caveat here) that allows for long periods of sustainable growth even though retailing is very competitive and the moats are squishy at best. Part of it is the simple growth formula of SSS + store openings. Operating leverage probably plays a role too.

Obviously, retail is a terrible business. But there are a few select companies that can unlock a sustainable growth formula. I think Ulta is one of them and I think the current pessimism will create a tremendous buying opportunity. I currently have a 2.5% starter position but hoping for further weakness.

Management seems top-notch, the strategy is sound, substantial white-space remains. And, as evidenced by some of the comments on this thread, the company is deeply misunderstood.
Title: Re: ULTA - Ulta Beauty
Post by: Cigarbutt on September 17, 2019, 03:22:19 PM
Thank you for this very interesting retail idea.
There may have been a 'wave' which is hard to assess for the long term but ULTA has taken a lot of good decisions in order to build significant market share along the way.
Is this a Walgreen moment, a simple temporary lull of 'innovation' in the cosmetics market or somewhere in between?

Like Costco, TJX and some others, ULTA has been able to focus on a specific segment of customers with impressive growth (top line AND bottom line) and some of this is likely to be enduring as they and their respective market keep evolving, despite the expected growing online threat (vs brick and mortar stores). They also have built what seems to be a very efficient loyalty program.
For valuation, I try to see what sales and net profit margins will be in five years and put a relative multiple on earnings then, and discount to now with additional discounting of free cash flows generated in the interim (which will be used for share buybacks presumably which adds another layer of uncertainty since the buybacks have not been done opportunistically in the past and returns on future buybacks will be related to multiples applied by the market).

A concern I have is the moving target of the number of stores in the US vs potential residual retail white space. Years ago, management implied a threshold at around 1000 stores, then 1200, then 1400 to 1700 stores. There is concern for cannibalization of sales and lower profitability for new stores. Unlike Costco which provides avg sales per warehouse vs year opened, I didn't see anything similar coming from ULTA (apart from occasional individual store maturation curves and a two-year payback objective) and wonder if the lower profitability and the context of the announcement may not be related to the realization that expansion plans will have to be adjusted. Also, remembering how Target fared in Canada, international expansion is not a guaranteed slam dunk.

All in all, despite the segment and despite the need to understand what certain customers really want, ULTA has built a significant franchise but I expect growth to be lower and consider that the recent net profit margins are not sustainable. It will be interesting to see how sales and profits line up for Q4, which is the most important quarter of the year.
Title: Re: ULTA - Ulta Beauty
Post by: KCLarkin on September 17, 2019, 06:46:49 PM
Also, remembering how Target fared in Canada, international expansion is not a guaranteed slam dunk.

Target's failure was a unique situation. They bought a failing discount department store's leases and opened up stores across the country. They didn't take time to localize their product or setup distribution. The execution was so awful, they completely destroyed their brand in Canada.

Ulta is going slow-and-steady, so they won't make that mistake. In Canada there is already a dominant retailer that carries both mass and prestige cosmetics - Shopper's Drug Mart. It will be interesting to see if Ulta can differentiate itself. Access to exclusive direct-to-consumer brands might help.
https://www.retail-insider.com/retail-insider/2019/7/makeup-monopoly-a-look-at-ulta-beautys-canadian-competitors


Title: Re: ULTA - Ulta Beauty
Post by: kab60 on October 30, 2019, 12:36:04 PM
I think this is a very interesting situation. It reminds me a bit of the Amazon scare in 2017 when temporary headwinds were interpreted as secular headwinds and a lot of quality retailers were left for dead (or when e.coli hit Chipotle).

You have a proven formula and a recipe for longterm earnings growth through SSS, new stores and operating leverage with fabolous economics.

And then you get a free option from international expansion as well as an activist taking a stake (debt free, so two years of FCF plus leverage up to 2xebitda would yield plus $4b or enough to retire around 30 pct. of shares at current level).

I wonder whether there's a longer term tailwind for "experimental" retailers like ULTA, since Amazon and the like makes it easier/quicker to do all the boring shopping - thus freeing up time to do the fun shopping. Or whether or not the (exaggerated) death of retail will work to deflate leasing costs.
Title: Re: ULTA - Ulta Beauty
Post by: kab60 on October 30, 2019, 01:44:22 PM
Wedgewood on Ulta: https://seekingalpha.com/article/4300543-wedgewood-partners-ulta-beauty-inc
Title: Re: ULTA - Ulta Beauty
Post by: kab60 on December 06, 2019, 08:09:59 AM
Working out pretty well so far. Quiet impressed by management. Combo of operating leverage, share repurchases, market share growth as well as SSS increases and new stores is a lot of things firing in the right direction. Longer term you seem to have favorable demographics, makeup possibly returning to growth and international expansion. Anyone have a view as to why/why not this would work outside the US? That's possibly hugely valuable but also pretty unknowable.
Title: Re: ULTA - Ulta Beauty
Post by: DooDiligence on December 06, 2019, 09:03:29 AM
Boots has done pretty well here.

Is there room for more?
Title: Re: ULTA - Ulta Beauty
Post by: KCLarkin on December 06, 2019, 11:56:47 AM
Working out pretty well so far. Quiet impressed by management. Combo of operating leverage, share repurchases, market share growth as well as SSS increases and new stores is a lot of things firing in the right direction. Longer term you seem to have favorable demographics, makeup possibly returning to growth and international expansion. Anyone have a view as to why/why not this would work outside the US? That's possibly hugely valuable but also pretty unknowable.

No surprises this quarter, which is great.

Ulta worked well in the U.S. because the Mass/Prestige brands had distinct channels (drug store/department store). Ulta built its business by offering both. In Canada, Shopper's Drug Mart already carries both mass and prestige. In the UK, I believe Boots does as well. Given Ulta's market share and exclusives, I think the international opportunity is real. But it is not guaranteed and will be a slow build.
Title: Re: ULTA - Ulta Beauty
Post by: KJP on December 07, 2019, 04:58:33 AM
Own the brands, L'Oreal, EL, LVMH etc. EM and travel is where the growth is at, not the US.

One of the things that struck me from the interview is how many phenomenal growth stocks over the years have been retailers: Home Depot, CVS, Walmart, Costco, TJX, Dollar General, Tractor Supply, Lululemon, Alimentation Couche-Tard, Ulta come immediately to mind. Over most time periods, several of the best performing stocks are retailers. For example, Kiplingers has a list of the top performing S&P 500 stocks over a 50 year period. Four of the top fifteen are retailers:

4. Dollar General
7. Lowe's
13. Walgreen's
15. TJX

There is something about retail (insert past performance caveat here) that allows for long periods of sustainable growth even though retailing is very competitive and the moats are squishy at best. Part of it is the simple growth formula of SSS + store openings. Operating leverage probably plays a role too.

Obviously, retail is a terrible business. But there are a few select companies that can unlock a sustainable growth formula. I think Ulta is one of them and I think the current pessimism will create a tremendous buying opportunity. I currently have a 2.5% starter position but hoping for further weakness.


Are you able to identify any common threads among the very successful retailers that you can use to identify potential winning retailers that are still early in their growth phase?  In other words, is there an underlying common business model or characteristic(s) that produces the SSS + store growth that, in turn, produces great returns on capital? 

To me, the list suggests some possibilities:

1.  Initial efficiency (from better logistics, management, etc.) leading to a permanent lower cost structure via economies of scale (Walmart, Lowe's, Home Depot, Costco, Dollar General)

2.  A better method of sourcing products that can be used at scale (Costco, Dollar General, TJX). 

3.  Getting people in the door via a necessary, likely low-margin item (gas/prescriptions/new car) and then getting them to buy other stuff while they're there (Couche-Tard, CVS(?), Walgreens(?), car dealerships)

I don't know enough about Tractor Supply to have any sense of whether it is similar to any of the above.  Lululemon is a brand that controls its own retail distribution via vertical integration, so I wouldn't group it with the other retailers, i.e., companies whose primary business is distributing other companies' products to consumers.

Also, given that retailing is a distribution business, you have to determine which historical examples are still relevant given the changes to distribution caused by the internet.
Title: Re: ULTA - Ulta Beauty
Post by: DooDiligence on December 07, 2019, 07:11:22 AM
I've gone into the Ulta in my town twice over the past 2 weeks.

The store was very busy & had a line at checkout on both visits.

They have multiple sections in the store where a stylist will help with applying different products.
They also have areas where products can be sampled without someone breathing down the customers neck.

The salon in the back of the store had clients in all the chairs who were having their hair done.

I've talked to the young ladies in class about where they get their beauty products & why they get them there.
The consensus is that there's loyalty to particular brands but not to any 1 outlet.

The complaints about Ulta were that they spam the crap out of you when you sign up for the loyalty program (natch).
I showed them how to find the unsubscribe button in an email, which was kind of funny, a 57 yo man schooling millennials on tech.
The upshot is, they like shopping there because of the selection & ability to sample & get instruction on product use & the pricing is OK.

Both visits, I left with the impression that this is a business with sustainability as long as they keep executing.
I do, however, feel that there are not too many barriers to entry other than scale.

I'm not sure how they initially attract someone into the store but can see how once a customer is aware of Ulta,
it becomes a reliable supplier of the brands a woman wants & a great source of discovering new ones.

You just can't beat product demonstrations.

That said, Dillards & all the big box stores have makeup counters which will do the same.

I think there's a segment which will become loyal to the stylists themselves more than the stores.
Title: Re: ULTA - Ulta Beauty
Post by: Cigarbutt on December 07, 2019, 07:19:46 AM
1-Good work KCLarkin. You correctly identified the sentiment overreach versus a fundamental and material deterioration. However, the numbers (lower sales growth, lower sales growth especially in the high margin category, lower sss growth) are IMO starting to define a new trajectory that will be discovered over time. The challenge is to discount the value of this trajectory without taking into account the separate amount of the subjective premium or discount that may be attributed to such trajectory. The point: forgetting the recent price convulsions, the market continues to be relatively optimistic about the ULTA's prospects. ULTA has done very well and adapts well to the new normal (lower capex in supply chain, slower geographic expansion) but retail is tough and the future value is related to future resilience, ie the challenge will continue.

2-The question KJP is asking is very relevant. Retail winners can be exceptional in the sense that returns can be fantastic but also in the sense that it's an unlikely outcome. I guess it's a case by case analysis. Let's make a parallel with Costco (another winner). Costco shares some characteristics (moat maintained despite online threat, relatively mature stage reached in the US, forward returns may come from international expansion). They also share their membership program which is a big plus. Costco has been able to earn great returns, in large part, because the revenues (and the loyalty) derived from the member card allowed them to accept lower operating margins, contributing to the perception of the value of the products and increased asset turnover. For Ulta, the membership's value has more to do with loyalty only but the program appears to be well run and explains a lot of the recurrence from customers. Costco, through various differentiating and enduring features, has been able to build value for specific customer segments and has been able to resist the online threat (so far). I think ULTA's main differentiating operating feature (apart from both prestige and mass appeal) has been the in-store presence of a services offering. The store concept and geographical footprint would be very hard to replicate. Below is a link that I found very useful for Costco and that helps to define how a retailer can build, maintain and even increase market share in an enduring way. A similar comparative exercise could be done for other winners that KJP mentions.
https://issuu.com/slowappreciation/docs/costco_deck

3-On the international expansion front, I have an opinion that is somewhat limited and anecdotal. I owned stock in a Canada-based pharmacy a while back. The chain had been privately founded and became public in the late 80's. The company was an example of a resilient retail winner. The great idea of the founder (in the 1960's) was to combine a pharmacy with a discount store, with the pharmacy situated at the back end of the store, allowing people to load up with stuff that they otherwise would have bought elsewhere. They did great but competitors came with a similar layout. The reason I invested in the 1990's was, among a few other reasons, because the franchised pharmacy chain had developed a beauty concept with a strategic localization and layout in their physical stores and that component became a significant profit driver. During the holding period (and also since then to a certain extent), I (anecdotally to some degree) compared how Canadian pharmacy chains had evolved vs CVS and Walgreens. Even if US pharmacies did well with the beauty and cosmetics segment, I always felt that CDN pharmacies did better in terms of their ability to capture a larger swath of the market. This is a reason why I think ULTA may have a relatively harder time with its footprint in Canada. The competitive landscape includes players in the mass market and the prestige categories but the main actor is Shoppers Drugmart and I would say that it may do a better job than CVS and Walgreen, both in terms of its present offering and its capacity to adapt to potential entrants.
https://www.retail-insider.com/retail-insider/2019/7/makeup-monopoly-a-look-at-ulta-beautys-canadian-competitors
http://strategyonline.ca/2019/08/12/shoppers-drug-mart-launches-the-beauty-project/

@DooDiligence
Thank you for the scuttlebutt work. :)
I don't have a natural inclination to connect with retailers but some people in my household explained to me how hanging out in some brick-and-mortar stores can make sense after an online connection of some sort (you should spend 2 minutes and watch some of those cosmetics youtube videos).
Title: Re: ULTA - Ulta Beauty
Post by: Spekulatius on December 07, 2019, 07:56:11 AM
What also helps ULTA is malls and department stores dying, imo. The department store entrance was a main area with high foot traffic where beauty products were demonstrated and sold. These areas now have way less foot traffic and the department stores itself are hurting, which even hurts the categories that have been healthy for them, opening the door to competitors with a sharp focus like ULTA.

Maybe thatís obvious, but I think ULTA (and Sephora) have secular tailwinds as long as Department stores keep withering away.
Title: Re: ULTA - Ulta Beauty
Post by: kab60 on January 14, 2020, 07:31:49 AM
A bit "old" but pretty good summary of the industry and challenges - as well as opportunities: https://www.cnbc.com/2019/12/27/how-department-stores-lost-their-clout-in-the-beauty-industry.html?__source=twitter%7Cmain
Title: Re: ULTA - Ulta Beauty
Post by: HalfMeasure on March 17, 2020, 02:43:32 PM
Anyone have a good feel for the worst case scenario here amidst COVID?
Title: Re: ULTA - Ulta Beauty
Post by: Cigarbutt on March 17, 2020, 03:54:36 PM
Anyone have a good feel for the worst case scenario here amidst COVID?
Assuming that the long term fundamentals are intact (moat etc), let's assume also three years of no earnings (which can be discounted to now, to about 30$ per share) and a PE of 15 on last year's earnings (about 12$ per share): 150=180-30
I guess this is a reasonable starting point for valuation. Things look bleak and may look bleaker but it is reasonable to assume that customers will eventually make up with the physical stores.
Title: Re: ULTA - Ulta Beauty
Post by: MarioP on March 17, 2020, 03:57:08 PM
Since we donít know how long the stores will be closed nobody can know. The hard base is the online sell of the last quarter. But it will be interesting to see which % of the stores sell will transfert online. It will be a good clue of the loyalty to the brand.
Title: Re: ULTA - Ulta Beauty
Post by: KCLarkin on March 20, 2020, 12:10:41 PM
I doubled my position today. Market is already pricing in prolonged store closures and a major recession. Ulta is net cash, so it can survive a brief depression.
Title: Re: ULTA - Ulta Beauty
Post by: roark33 on March 20, 2020, 12:43:53 PM
The operating leverage on retailers can be brutal, also, one thought is that people who are still wearing make-up (my wife hasn't the past week because she has barely left the house), might develop an online shopping habit. 

I like the company and the stock, just thinking out loud regarding the negatives.
Title: Re: ULTA - Ulta Beauty
Post by: KCLarkin on March 20, 2020, 12:57:15 PM
The operating leverage on retailers can be brutal

Sure. But let's assume they keep all fixed costs and revenue goes to $0 for one year. They lose $1.5B. They have $400 M in cash. Some inventory. A line of credit. I think they survive.

In this scenario, every department store is out of business. Duty free sales of cosmetics are zero. Ulta is ramping up delivery, etc.
Title: Re: ULTA - Ulta Beauty
Post by: DooDiligence on June 12, 2020, 10:37:19 AM
A "clean sheet" is a great thing for a keeper, but for ULTA, eek. This could go either way.

They've been making strides in e-commerce but IDK, will trying on virtual makeup really work? I checked it out & it was funny as hell (TBF, I'm a dude & have never worn makeup & have no plans to start any time soon). This may just work for some shoppers though.

www.wsj.com/articles/ulta-beauty-undertakes-review-of-its-1-254-stores-11591797600

Small position here.
Title: Re: ULTA - Ulta Beauty
Post by: roark33 on June 12, 2020, 11:00:57 AM
My wife ordered directly from her make-up company during the shutdown, saved $15 vs Ulta price and had free delivery.  It took like 2 weeks to come, but I expect brands to improve their ecommerce area, and for her, she knows what makeup she needs, so she will start ordered from direct from now own.  (her order was only $45, so $15 was a big amount, i.e. was $60 at ulta). 
Title: Re: ULTA - Ulta Beauty
Post by: DooDiligence on June 12, 2020, 01:19:34 PM
My wife ordered directly from her make-up company during the shutdown, saved $15 vs Ulta price and had free delivery.  It took like 2 weeks to come, but I expect brands to improve their ecommerce area, and for her, she knows what makeup she needs, so she will start ordered from direct from now own.  (her order was only $45, so $15 was a big amount, i.e. was $60 at ulta).

What was the company she ordered from?
Title: Re: ULTA - Ulta Beauty
Post by: roark33 on June 12, 2020, 01:23:54 PM
Lancome. 
Title: Re: ULTA - Ulta Beauty
Post by: DooDiligence on June 12, 2020, 01:30:59 PM
Lancome.

DTC, the internet is the great leveler.
Title: Re: ULTA - Ulta Beauty
Post by: valueinvestor on June 12, 2020, 01:37:28 PM
Lancome.

DTC, the internet is the great leveler.

Shopify.
Title: Re: ULTA - Ulta Beauty
Post by: roark33 on June 12, 2020, 02:54:04 PM
You could tell that Lancome doesn't have their DTC game up to speed, it took almost two weeks and we had no notifications of it being sent or anything.  But the huge price differential, and the ease of ordering does make me really think about these marginal purchases as a drag on Ulta going forward. 
Title: Re: ULTA - Ulta Beauty
Post by: KCLarkin on June 12, 2020, 03:33:27 PM
You could tell that Lancome doesn't have their DTC game up to speed, it took almost two weeks and we had no notifications of it being sent or anything.  But the huge price differential, and the ease of ordering does make me really think about these marginal purchases as a drag on Ulta going forward.

Really surprised Lancome would risk channel conflict, especially with such horrible fullfillment.
Title: Re: ULTA - Ulta Beauty
Post by: roark33 on June 15, 2020, 08:32:06 AM
https://www.ft.com/content/ab917d5d-e601-44ba-9a2c-53dbb2146dc7

Title: Re: ULTA - Ulta Beauty
Post by: kab60 on July 23, 2020, 05:37:33 AM
Alliance Data Systems, of which Ulta is a major client, with fine Q2 results. They note that Beauty (and home decor) are strong categories despite c19. I have a position in Ulta and will buy more. I think they are uniquely positioned to come stronger out of this. Lower rent, better locations, departement stores hurting and JCP troubles a possible hit to Sephora. Clean balance sheet so a combination of high ROIC, SSS and new unit growth as well as buybacks can be a very powerful combination. And then international expension as a joker/option.
Title: Re: ULTA - Ulta Beauty
Post by: kab60 on August 04, 2020, 07:46:35 AM
Bullish take on Ulta: https://www.barrons.com/articles/why-ulta-beauty-shares-can-gain-55-portfolio-manager-51595612327

I suppose the bear case is that retail is dead, they mostly saturated the market with stores, membership growth slowing and if SSS starts trending in the wrong direction they're in for a lot of hurt. But this thing used to trade at plus 40xEPS, now at 16x2019.

Also a story on how cosmetics retailers are remaking the sample experience in a world without touching: https://www.cnbc.com/2020/07/30/how-cosmetics-are-remaking-sample-experience-in-contactless-world.html
Title: Re: ULTA - Ulta Beauty
Post by: kab60 on August 27, 2020, 01:25:08 PM
Boom, smashed it. Not sure why market is so positive on the release, but comments look good - SSS only down a 'lil bit in August and actually made money in the Q.