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Beauty and CosmeticsUlta Beauty, Inc – ULTAUlta Beauty, Inc. – ULTAvBuy – Target: 306.00Current Price: 251.21Investment ThesisULTA Beauty (ULTA), a beauty and cosmeticsretailer with in store salons, has pulled back over20% from their high last month due to cosmeticdiscounting at the major department stores forthe first time. News of the discounting sent ULTAinto a tailspin even though ULTA is one of thefastest growing retailers with a double-digitgrowth rate with plenty of upside.Management recently increased their storetarget from 1,200 to 1,400-1,700 stores whileopening 100 new stores each year.We believe that ULTA is an ideal valueinvestment. They are quickly expanding theircompetitive advantage by offering an excellentrewards program, a new store credit card,improving margins, more online sales andcrucially - less discounts. While their competitorsare offering more promotions to drive traffic,June and July were some of ULTA’s leastpromotional months – this speaks to both theirgrowthandmarginpotential.ULTA’sfundamentals are marching forward while theircompetitors are desperately trying not to fallbackwards.CatalystSource: Bloomberg, JWC ResearchPricing: We believe the market has overreactedto the potential headwinds for ULTA’s businessmodel. This 20% pullback in the stock pricepresents an ideal buying opportunity for acompany with impressive growth and long termpotential.Loyalty Program: The ULTA loyalty programhas been enviably successful. Their memberstypically remain impressively loyal and now thatULTA is rolling out the MAC makeup brand –typically only offered in MAC stores – we expecttheir loyalty program, with the help of their newstore credit card program, to continue to grow atan impressive rate.Weekly Chart*Please see disclaimer at the end of this report.Source: Stockcharts.com2017 JWC Research. All rights reserved. No part of this report may be reproduced or transmitted in any form or by any means, electronic ormechanical, including photocopying or by any information storage and retrieval system, without permission in writing from JWC Research.www.JWCResearch.comPage 1July 31, 2017This Report is limited solely for the use of clients of JWC Research – DO NOT Forward

Beauty and CosmeticsUlta Beauty, Inc – ULTAWhat is the JWC Confidence ScoreThe JWC Confidence Score is designed to quickly give our clients the key bullish and bearish points basedon the JWC Research process - scoring the industry, operations, management team and valuation. TheJWC Confidence Score utilizes 100 as a baseline score. The analyst then scores each segment of theiranalysis, decreasing it for bearish signs and increasing it for bullish signs. The graph shows a recap ofthis analysis with the company score being an average of the four sections. The JWC Confidence Scoreis continually monitored and updates are released based on any changes to the JWC Confidence Score.JWC Confidence ScoreJWC Confidence ScoreIndustry: 90Bull: The nature of the beauty industry insulatesit from the effects of Amazon as consumerstypically want to see it in person before they buy.And once a customer finds ‘their product,’ theytend to remain loyal.Bear: Heavy discounting from department storesis creating headwinds that have driven ULTAdown 20% since early June. This could have animpact on near term earnings.Operations: 140Bull: Their in-store salon and wide productoffering has allowed for impressive double digitgrowth and customer loyalty.Bear: Although they have a wide productoffering, a large portion of their sales comes froma few key brands. This creates some supplierleverage that could be an issue if not properlymanaged.Management: 100Bull: Management has consistently bought backstock and we expect this favorable trend tocontinue.Bear: An independent director sold 200 millionworth of ULTA last September. That was 30% ofhis stake and was sold at 229.56 – less thantoday’s price.Valuation: 100Bull: Free cash flow has been solid and isimproving. Management has done a good jobcontrolling costs and maintaining growth. Weexpect this to continue.Ulta Beauty, Inc. (ULTA): 110Bull: The growth of ULTA is being overlooked inthe recent stock price downturn. We believe thatthe street will recognize this in the comingquarters as department stores normalizepricing.Bear: Department stores have long been the goto for cosmetics and are fighting to maintainrelevance. Ultimately, we believe ULTA willcontinue to grow at a substantial rate, but it’spossible that department stores stick with pricediscounting longer than expected.Bear: We are not fans of a capital structure thathas zero debt in a historically low interest rateenvironment. We believe some additional debtcould improve growth in a meaningful waywithout threatening the balance sheet.www.JWCResearch.comPage 2July 31, 2017This Report is limited solely for the use of clients of JWC Research – DO NOT Forward

Beauty and CosmeticsUlta Beauty, Inc – ULTACompany DescriptionULTA Beauty is the largest beauty retailer in the UnitedStates that provides a bright and open storeenvironment that encourages guests to enjoydiscovering new products and services. It offers morethan 20,000 products from approximately 500 wellestablished and emerging brands. Their beautyproducts include cosmetics, fragrance, skin careproducts, hair care products and salon services. As ofJanuary 28,2017, they operated 974 retail storesacross 48 states and the District of Columbia (Figure1), as well as e-commerce website.Figure 1. Store Count2012 -2016Industry OverviewCompetition: The competitive landscape has shiftedin the beauty retail industry with the two primary painpoints being e-commerce and drugstores. E-commercesales, fueled by Amazon, is a threat to traditionaldepartment and retail stores. On one hand, consumersshifted away from department stores in favor orbeauty, cosmetics and fragrance stores. On the otherhand, they opt for the convenience and wide selectionof products offered online. Online prices are usuallylower due to much reduced overhead and labor costs.Source: Company FilingsDrugstores and mass merchandisers have also begunto offer a variety of beauty products at a much lowerprice, some of which also utilize natural and organicformulas. Additionally, the retail giants Target andWalmart have even expanded their cosmetic productlines, some of which are exclusively made for them.That’s the bad news. The good news: Women betweenthe ages of 35-54 represent the largest percentage ofthe industry’s customer base. This demographic isgrowing from both a numbers and disposable incomeperspective. Many of these women prefer theconvenience and experience that beauty stores likeULTA and Sephora offer. This remains a leading reasonwhy ULTA has continued to post sector leading samestore sales over the past few years and is expected tocontinue to do so.Beauty Trend: The competitive landscape of goingorganic and pursuing healthy lifestyles has intensifiedin recent years. Demand for natural ingredients andnaturally produced beauty products will continue toinspire product innovation and spur investments inresearch and development, ultimately creating newkwww.JWCResearch.comPage 3July 31, 2017This Report is limited solely for the use of clients of JWC Research – DO NOT Forward

Beauty and CosmeticsUlta Beauty, Inc – ULTAIndustry Overview(continued)products with higher price points and improvedmargins. The industry has already provenincreasing demand for higher-end products,whichhaveremainedpopularamongmillennials. We believe that new formulas willserve as a catalyst and continue to grow salesand profits.Customer Service: Young generations (ages20-35) now shop for experience instead ofmaterials. To cater to their needs, retailersmust be creative and come up with exceptionalideas or events, both in-store and online, toestablish unique customer experience and drivetraffic. It is much more convenient to order apiece of furniture online and have it deliveredto your home with free shipping than going tothe store. However, for skincare products,trying on is a plus or even a necessity forsensitive skin before you confirm that it suitsyour skin type and decide to make a purchase.Therefore, skilled staff must demonstrate theircare for customers during the personalizedservice and it will encourage repeated salesthrough customer loyalty.Wrap Up: The beauty industry has struggledrecently as department stores, once the leadersin the ‘customer experience’ segment of themarket, have drastically discounted theirbeauty products to stay relevant in a strugglingretail environment. Yet despite this last-ditcheffort, consumers continue to shift away fromdepartment stores to specialty beauty storeslike ULTA and Sephora. We believe this trendwill continue as beauty stores continue toexpand their product offerings (Figure 2) andthey will pick up many of the millennials thatare starting to hit the job market.Figure 2. Acceleration of Major New Brand AdditionsSource: Company Presentationwww.JWCResearch.comPage 4July 31, 2017This Report is limited solely for the use of clients of JWC Research – DO NOT Forward

Beauty and CosmeticsUlta Beauty, Inc – ULTAA Quick Look at OperationsFigure 3. E-commerce SalesGrowth: ULTA currently operates 990 storesin 48 states that are located primarily in stripmalls in suburban areas. They have started toinvest in urban site selections and hope tocontinue their success in developing bothsuburban and urban markets. Their stated goalis growing their store count to 1400-1700stores over the next few years. Currentexpectations are growth of 100 new storesannually. With their current 471 million incash and short term investments, and anaverage cost of 1.4 million for a new 10,000square foot location, ULTA has enough cash tofund over 300 stores today. Consequently, weexpect the 100 new stores a year to be anachievable goal.Rewards: 90% of the revenue comes fromloyalty program members and there has beenrapid growth in Loyalty Program Membershiprecently. To continue loyalty program growth,Ulta recently launched their co-branded andprivate label credit card, which reinforces theirgoal on the loyalty membership program. Theybelieve that the embedded benefits of openinga credit card with Ulta will help them providespecial offers and retain more loyal customers.Source: Company Filings, JWC ResearchCompetitive advantage: What separatesUlta from their competitors is the ‘experience’that one gets when shopping at Ulta. Each Ultalocation is equipped with a full-service salonand brow bar. Combine that with the Glam Labmobile app and a customer loyalty programwhich offers monetary rewards instead ofpoints, Ulta is well positioned to keepexpanding their footprint across all Americaregardless of the retail headwinds triggered byAmazon.(continued )www.JWCResearch.comPage 5July 31, 2017This Report is limited solely for the use of clients of JWC Research – DO NOT Forward

Beauty and CosmeticsUlta Beauty, Inc – ULTAA Quick Look at erceoperations play an increasingly important roleto the business. As of January 2017, annual ecommerce sales reached 345 million, whichaccounts for 7.1% of total sales and 56%growth from 221 million from the previousyear (Figure 3). Management aims to achieve10% e-commerce penetration by 2019. Thekey for the sales resides in its brand portfolio.With more than 20,000 products from around500 brands priced moderate to higher-end,anyone who walks into the store will be able toidentify their favorites with the assistance ofUlta’s trained staff. In addition to the wideselection of merchandise, Ulta recentlyintroduced an app called “Glam Lab” wherecustomers can test the product and try onmake-up digitally (take a selfie and applymakeup to your picture).Customized Services: A key to Ulta’s successis their full-service salons and they have beenworking on raising the awareness of it (Figure4). In 2016, salon sales increased 15.2% to 241,1 million, representing 5% of totalcompany sales. Per a company survey, browbar and salon guests spend almost three timesas much as non-salon guests, and shop twotimes more than non-salon guests. We believethat Ulta’s professional in-store salon and browbar are what differentiate them from bothonline and the typical brink and mortarretailers.Figure 4. Pillars of Service OfferingsSource: Company Presentationwww.JWCResearch.comPage 6July 31, 2017This Report is limited solely for the use of clients of JWC Research – DO NOT Forward

Beauty and CosmeticsUlta Beauty, Inc – ULTAManagementFigure 5. Share RepurchasesOur View: Management has consistently stuckwith their share repurchase program to protectshareholder value (Figure 5). On March 9,2017, the company announced that theyauthorized the repurchase of up to 425 millionof the Company’s common stock. Based ontheir track record, we believe that ULTA willstick with their share repurchase program.Historically, ULTA invests their free cash flowprimarily in their new store program, brandexpansion and better information technologysystems. As they strive to improve theirbalance between in-store and e-commercesales, we expect to see more “better-thanexpected” earnings on their way to a largerstore base.JWC ValuationValuation: In Q1 2017, ULTA deliveredanother robust quarter with solid sales gains,and their 14.3% same store sales growth wentway above the initial guidance of 9%-11%. Our 306 price target is based on our discountedcash flow (DCF) valuation (Figures 7 & 8). Weuse a WACC of 8.5% and a perpetual growthrate of 3.5%.Source: Company Filings, JWC ResearchFigure 6. Shares Outstanding(2014 - present)Capital Structure: ULTA generated 261million in free cash flow in fiscal 2016, afterinvesting 374 million in capital expenditures tohelp fuel same and new store growth. Theycurrently have a 200 million revolver that isunused and no outstanding bonds. Given their 5 billion in revenue and strong free cash flowover the past 12 months, we believe that amoderate amount of debt ( 200 to 300million) could materially contribute to growthwithout a burdensome interest expense.ULTA became part of the S&P 500 Index in April2016, which can be viewed as an indication oftheir strong financial position.Source: Company Filingswww.JWCResearch.comPage 7July 31, 2017This Report is limited solely for the use of clients of JWC Research – DO NOT Forward

Beauty and CosmeticsUlta Beauty, Inc – ULTAFigure 7. JWC Free Cash FlowFigure 8. DCF AssumptionsMajor DCF AssumptionsRisk Free Rate (10 yr treasury)Equity Risk PremiumBeta (2 yr avg)Country PremiumExpected Market ReturnCost of EquitySource: JWC Research,Company Filings,Bloomberg2.296.281.016.218.508.56Figure 9. Debt Maturity Profile ( millions) ****ULTA Currently has no outstanding debt & a 200 million revolver availablewww.JWCResearch.comPage 8July 31, 2017This Report is limited solely for the use of clients of JWC Research – DO NOT Forward

Beauty and CosmeticsUlta Beauty, Inc – ULTARisksGrowth Plans: ULTA has mapped out a growth planto open approximately 100 new stores every year,which are predominately located in convenient, hightraffic locations in the hope that they cancontinuously keep loyal clients, attract new clientsand generate steady sales. If they have troublekeeping up with their business strategy, net salesand operating profit will not increase as planned andthis would affect our valuation.Figure 10. Estimates & Key DataVendor Partnerships: ULTA Beauty is currentlymaintaining an active and strong relationship withmore than 400 vendor partners. However, the top 10vendor partners made a significant contribution tonearly half of the total net sales in fiscal 2016. SinceULTA’s success is highly dependent on the ability ofvendors to offer a unique combination of beautyproducts and services to the customers, if the keyvendors do not perform well, the long-termagreement changes, or vendor partners fail toprovide ULTA with enough products to support instock levels, it would be difficult to assumeprofitability and cash flows for the business.Market Sentiment: Beauty trends are somewhatunpredictable and so are consumers’ behavior. IfULTA has difficulty identifying products and servicesin response to beauty trends and consumers’preferences in a timely manner, they are losingpower to drive store traffic and comparable sales.Additionally, the cost of sales is subject to supply anddemand of the market. If there are any disruptionsof distribution infrastructure due to costs, ULTA willface challenges in their operations.Source: Bloomberg, JWC ResearchDepartment Store Discounts: Department storeshave discounted their beauty products to driveconsumer to their locations. This has added somepressure to the Beauty and Cosmetics industry. Webelieve this is sustainable only for a short while andpricing will revert to the mean. If this takes longerthan we expect, this could have a meaningful impacton our valuation.www.JWCResearch.comPage 9July 31, 2017This Report is limited solely for the use of clients of JWC Research – DO NOT Forward

Beauty and CosmeticsUlta Beauty, Inc – ULTAJWC Rating SystemsBuy: The stock’s total return is expected to outperform the S&P 500 over the next 12 months.Avoid: The stock’s outlook and drivers are too unpredictable. This stock should be avoided.Sell: The stock’s total return is expected to materially underperform the S&P 500 over the next 12months.JWC Research DisclaimerJWC Research is an independent investment research provider and is not a member of the FINRA or the SIPC. JWCResearch is not a registered broker dealer and does not have investment banking operations. The JWC Researchtrademark, service mark and logo are the intellectual property of JWC Research Inc. The information contained in thisresearch report is produced and copyrighted by JWC Research, and any unauthorized use, duplication, redistributionor disclosure is prohibited by law and can result in prosecution.The content of this report may be derived from JWC Research reports, notes, or analyses. The opinions and informationcontained herein have been obtained or derived from sources believed to be reliable, but JWC Research makes norepresentation as to their timeliness, accuracy or completeness or for their suitability for any particular purpose. Thisreport is not an offer to sell or a solicitation of an offer to buy any security.The information and material presented in this report are for general information only and do not specifically addressindividual investment objectives, financial situations or the particular needs of any specific person who may receivethis report. Investing in any security or investment strategies discussed may not be suitable for you and it isrecommended that you consult an independent investment advisor. Nothing in this report constitutes individualinvestment, legal or tax advice. JWC Research may issue or may have issued other reports that are inconsistent withor may reach different conclusions than those represented in this report, and all opinions are reflective of judgmentsmade on the original date of publication. JWC Research is under no obligation to ensure that other reports are broughtto the attention of any recipient of this report. JWC Research shall accept no liability for any loss arising from the useof this report, nor shall JWC Research treat all recipients of this report as customers simply by virtue of their receipt ofthis material.Investments involve risk and an investor may incur either profits or losses. Past performance should not be taken asan indication or guarantee of future performance. JWC Research officers, employees, agents and/or affiliates may havepositions in stocks discussed in this report. No JWC Research officers, employees, agents and/or affiliates may serveas officers or directors of covered companies, or may own more than one percent of a covered company’s stock.www.JWCResearch.comPage 10July 31, 2017This Report is limited solely for the use of clients of JWC Research – DO NOT Forward

This Report is limited solely for the use of clients of JWC Research – DO NOT Forward . Ulta Beauty, Inc – ULTA Beauty and Cosmetics www.JWCResearch.com Page 3 July 31, 2017 . Company Description . ULTA Beauty is the largest beauty retailer in the United States that provides a bright and open store environment that encourages guests to enjoy