Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA): A New CEO for This Growing Company

Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) is a one-stop beauty superstore. Each location has a full-service salon and sells cosmetics, fragrances, haircare, skincare, bath and body products, and salon styling tools. The company operates 576 retail stores in 46 states and online.

Ulta just hired Mary Dillon from U.S. Cellular to be its new CEO. Prior to U.S. Cellular, Dillon held key positions at McDonald’s Corporation (NYSE:MCD) and PepsiCo, Inc. (NYSE:PEP).

Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA)

A compelling growth story

What’s most interesting to me about the Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) story is that there is no large-scale competitor. The company competes with Sally Beauty Holdings, Inc. (NYSE:SBH) in beauty supplies and Regis Corporation (NYSE:RGS) in the hair salon business. However, neither one has adopted the Ulta business model and combined the two businesses. In many ways the concept is a no-brainer. Go to the salon and get your hair done and then buy your cosmetics at the same salon.

In the first quarter of this year, revenues grew 22.9% and comparable store sales increased 6.7%. E-commerce sales grew 70%.  Earnings per share increased 20.4% to $0.65 per share. Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) repurchased $37 million in stock.

In terms of store openings, the company opened 26 new stores during the quarter.. Each store averages $2.8 million in revenues for the first year and ramps up to $4 million by year five. Total new store investment is about $1 million and payback is roughly two years. The company has already approved 50 new locations. For the rest of the year, the company expects to have opened a total of 125 new stores. Ulta will also remodel seven stores. The company is also active is putting new products onto the shelves for its customers to choose from.

Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) has seen strong growth in online sales. That is likely to continue as the company redesigns its website and streamlines the checkout process. The company is also expanding its distribution center to handle orders more efficiently.

For the rest of the year, the company is forecasting comparable store sales growth of 4% to 6%. The company expects earnings growth of 25% to 30%. Ulta is going to spend $125 million on new store openings and an additional $100 million will be re-invested in the business.

The competition

Sally Beauty Holdings, Inc. (NYSE:SBH) operates over 2,700 beauty supply stores worldwide. The company does have a larger retail presence than Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA), but it’s primary customer is the professional salon. Sally Beauty is also growing considerably less than Ulta. Consolidated same-store sales actually decreased by 0.8% in the second quarter. Overall sales grew 1% to $898 million.

Sally Beauty is much more of a value play than Ulta. Sally Beauty’s gross profit margin in the second quarter was 49.5%. The company repurchased $191 million in stock. This repurchase completed its $300 million program and the company authorized a new $700 million repurchase program. On the balance sheet there’s $293 million in cash and no debt.

Regis Corporation (NYSE:RGS) is best known for its Supercuts franchise and the salons in Wal-Mart Stores, Inc. (NYSE:WMT). The company thou is a work in progress as service traffic at its location has been trending lower. The company has extended salon hours to help bring in traffic, but that has resulted in lower margins as expenses increased.

Going forward, Regis is a turnaround play. The problem is that the turnaround requires the work of lots of people. The company has over 10,000 locations. It takes the work of a great stylist to keep customers coming in. Let’s face it, not everyone can cut hair well. That’s the challenge that Regis is dealt. The company is making an effort to tackle this problem by beefing up its field organization to better execute in its salons. Management is working to make Regis into an efficient operation, but it will take time.

Foolish assessment

Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) has a compelling business model and is primed for further growth. New CEO Mary Dillon has a lot of experience in marketing and I see her continuing to grow the business. The stock remains volatile, but the long-term future for Ulta remains bright.

The article A New CEO for This Growing Company originally appeared on Fool.com and is written by Mark Yagalla.

Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Ulta Salon, Cosmetics & Fragrance. The Motley Fool owns shares of Ulta Salon, Cosmetics & Fragrance. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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