Lone Pine Capital disclosed in its 13F filing with the SEC for the second quarter of 2012 that it had more than doubled the size of its position in Ulta Salon, Cosmetics & Fragrances, Inc. (NASDAQ:ULTA). The fund owned 3.5 million shares at the end of June. Lone Pine, which has about $17 billion under management, is managed by Stephen Mandel; Mandel, whose net worth is estimated to be around $1.5 billion, is a former employee of Tiger Management (read more about Lone Pine's performance and portfolio). Ulta Salon Cosmetics, founded in 1990, operates about 500 stores which provide salon products and services across the U.S.
Billionaire Steve Cohen’s SAC Capital Advisors came to the same conclusion during the second quarter that Lone Pine did. SAC, which owned a small number of shares of Ulta Salon, Cosmetics & Fragrances, Inc. at the end of March, increased its position over the course of the quarter to a total of about 850,000 shares (see more of Steve Cohen's stock picks). Donald Chiboucis’s Columbus Circle Investors reduced its stake in the company but still closed June with 1.3 million shares in its portfolio (find more stocks that Columbus Circle owns).
Ulta Salon, Cosmetics & Fragrances, Inc. is off to a great start this year. In the first half of the fiscal year (which ends in January), it grew its revenue by 22% compared to the same period last year; it seems that both quarters of the year saw about the same growth rate. Margins have been up as well, causing net income to rise 48%. Some of this has been due to the company’s expansion, but we still see same-store sales growth of about 10% in addition to the opening of new locations. And expansion continues: the company dug into its cash reserves to help fund its purchases of property and equipment in the first six months, but still closed the second fiscal quarter with $197 million in cash and cash equivalents on its balance sheet, slightly more than Ulta Salon’s total current liabilities. The company does not expect the same level of same-store growth to continue in the future, with internal projections assuming a rate between 3 and 5%.
Ulta Salon has gotten quite a bit of attention from the market, however, and it is not a stealthy growth play: it trades at 44 times trailing earnings and 30 times consensus expectations for next year. The five-year PEG ratio is 1.5, which suggests that even over the longer term the price may be too high to make the stock a good value even if an investor assumes strong growth.
We think that Regis Corporation (NYSE:RGS) is Ulta Salon’s closest peer. Regis, which operates and franchises hair salons, saw its revenue decrease last quarter compared to a year ago. However, it is considerably cheaper relative to its earnings when compared to its larger peer (Regis’s market cap is only about $1 billion): the forward P/E is 14. Activist hedge fund Starboard Value has a large stake in RGS. Three other beauty care companies, which we would consider as peers, are Sally Beauty Holdings, Inc. (NYSE:SBH), Estee Lauder Companies Inc (NYSE:EL), and Avon Products, Inc. (NYSE:AVP). The stocks all carry trailing P/E multiples between 23 and 28, reflecting a market expectation for strong growth in beauty related companies. Some of this growth shows up fairly quickly in Street estimates: Sally Beauty, Estee Lauder, and Avon trade at 17, 21, and 16 times forward earnings, respectively. Combined with Regis’s figure, this makes Ulta Salon look somewhat overpriced on a forward basis. However, none of these three companies match the salon in terms of recent growth: Sally Beauty’s earnings were stagnant last quarter versus the same period last year, while Avon’s plummeted and Estee Lauder’s were up a respectable- but still smaller- 25%. Mandel seems very intrigued by Ulta Salon’s growth, driven by same-store sales but also including an expansion in the number of locations, and likely believes that it will grow even faster than the sell-side and the market expect.