Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA), Elizabeth Arden, Inc. (RDEN): This Stock Looks Ugly for Now, but can Beautify Your Portfolio in the Long Run

The soothsayer warned Caesar to “beware the Ides of March” in the Shakespearean play Julius Caesar. But there was no such warning for Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) investors as the stock tumbled more than 16% on the day. The beauty retailer’s earnings outlook for the current quarter failed to match up to consensus estimates, leading to a massive sell-off.

The stock has endured a rough time over the past month, falling close to 25% ever since former CEO Chuck Rubin moved on to pursue another opportunity. The latest earnings call didn’t inspire much confidence either, as Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) failed to top off a solid quarterly report with a decent outlook. These events have pushed the stock to within sniffing distance of its 52-week low, a far cry from the near 52-week high levels it was trading at before things started going haywire.

An impressive past

However, the stock’s fall from grace could well be an opportunity for investors to either enter the stock or add to their existing position, since the company is still growing at a decent pace. Ulta has exhibited terrific improvement in revenue, earnings, and margins over the past five years. It hasn’t been a dud as far as share price appreciation is concerned either.

Best of all, the stock is a lot cheaper than what it used to be, with a trailing P/E of around 28 times, which won’t seem too expensive once you look at the chart given below.

ULTA Revenue TTM data by YCharts

Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) has been on a terrific run, which continued in its recently-reported quarter. For the full year, Ulta grew revenue 25%, accompanied by a 41% jump in earnings, and an 8.8% growth in same-store sales. The company is intent on keeping the momentum intact this fiscal year, built on the foundation of its 5-point multiyear growth strategy.

The drive to get better

Ulta currently has 550 stores in 45 states, and is looking to take that number up to 675 by the end of the year, representing an increase of almost 23%. One-third of the new openings will be in markets where Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) doesn’t have a presence. More importantly, the company isn’t just increasing square footage and opening stores, it is also updating its stores to its new format.

The company has an experienced real estate team, which has led its aggressive expansion efficiently so far. This store expansion has been well-complemented by Ulta’s brand and product expansion. The company added 20 new brands to its already swelling portfolio last year, and this puts it in an advantageous position against peers such as Elizabeth Arden, Inc. (NASDAQ:RDEN).

Elizabeth Arden, Inc. (NASDAQ:RDEN), which is primarily known for celebrity fragrances and Prevage anti-aging creams, has been witnessing tough times due to its reliance on departmental stores. Elizabeth Arden, Inc. (NASDAQ:RDEN) is in the midst of a brand overhaul, and has been acquiring licenses for more celebrity fragrances. However, it falls way behind Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA)’s huge assortment of 500 brands and its growth strategy doesn’t evoke the same amount of precision and panache as Ulta does.

In addition, Ulta’s boutiques have been doing quite well. It is looking to expand them further this year, which puts it in direct competition with a department store such as Macy’s, Inc. (NYSE:M). Macy’s also offers beauty products in its department stores apart from offering salon services to customers. It has around 840 stores, enabling it to have a farther reach than that of Ulta. But, Ulta is focused on expanding aggressively, and it won’t be surprising if it manages to wipe out the gap in the next three years.

Macy’s is currently engaged in a squabble with J.C. Penney Company, Inc. (NYSE:JCP) and Martha Stewart, in an effort to guard its market share. Thus, it would be the correct time for Ulta to move in on Macy’s turf aggressively and it’s doing the same — opening boutiques by taking a small hit on the bottom line.

Apart from these moves, Ulta is focused on expanding its loyalty program member base further from the present strength of 11 million. Also, the company’s e-commerce business has been doing well and a site redesign is on the cards this year in order to make the experience even better. Moreover, Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) is looking to give e-commerce a concerted push this year by improving its fulfillment capabilities through its distribution centers.

The takeaway

While the absence of a full-time CEO is undoubtedly an area of concern, the company’s senior management does seem to possess the experience to guide Ulta for the time being. Ulta’s business is still a growing one, and the company is doing its best to get better in the future. The stock has had a tough time of late, but the long-term story still looks good.

The article This Stock Looks Ugly for Now, but can Beautify Your Portfolio in the Long Run originally appeared on Fool.com.

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