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Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA), Macy’s, Inc. (M), Elizabeth Arden, Inc. (RDEN): Hold on to This Winner, It’s Still a Good Investment

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Beauty retailer Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA), has gone from being ugly to pretty in the space of just six months. The stock was trading close to its 52-week low in March this year after Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA)’s outlook disappointed analysts, but it hit a new 52-week high last Friday after second-quarter results beat estimates.

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

Shares spiked more than 16% after Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA)’s earnings of $0.70 per share came in ahead of the $0.67 consensus estimate. The company’s revenue of $601 million was comprehensively ahead of the $588 million expectation. What’s more, the year-over-year readings were also fantastic. Revenue was up 25% from the year-ago quarter while net income jumped 28.3% to $44.9 million.

Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA)’s earnings guidance of $0.71-$0.74 per share for the current quarter — below the expectation of $0.76 per share — didn’t dampen investors’ spirits either. With the company reiterating its full-year guidance, there wasn’t much reason to panic.

But with shares trading at an expensive 42 times earnings now, should investors continue holding Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA)? Given the company’s impressive growth rate so far, and also the fact that analysts are expecting earnings to grow at an annual rate of 23% for the next five years, a rich valuation might be justified.

Some pretty strategies
Ulta Salon has executed well on its strategies so far — leading to tremendous growth — and new CEO Mary Dillon is keen on building on the company’s solid foundation further. Management will continue to focus on expanding the store network, merchandise additions, the e-commerce business, etc.

Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) presently has 609 stores and it plans to open another 66 in the two remaining quarters of the fiscal year. More importantly, the company has been aggressively remodeling its existing stores and only 38 stores will run on the old format by the end of the year. In addition, new store productivity has also been robust as Ulta focuses on the quality of its locations along with marketing initiatives.

Management has already approved 90 store sites for fiscal 2014 as it works toward its long-term goal of growing square footage at a rate of 15% to 20%. But to complement store growth, a strong product assortment is also necessary, and that’s why the company keeps adding new products and services to its portfolio.

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