Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA): The Ultimate Beauty Solution

Avon Products, Inc. (NYSE:AVP) is more of a direct competitor as it manufactures and markets beauty products through direct selling and independent representatives. With revenue of over $10 billion, it is definitely a target for Ulta to take market share. Instead of dealing with a friend that resells Avon Products, Inc. (NYSE:AVP), the hopes are that Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) will provide a more convenient and appealing option. The vast selection at Ulta, including the new Clinique and Lancôme boutiques, hopefully pulls consumers from the historical direct marketing model.

Like most in the general sector, Avon is facing flat to declining growth. The stock has a substantial market value of over $10 billion and only trades at 1 times revenue due to the lack of growth. Surprisingly, analysts see earnings surging over the next few years, allowing the stock to trade at over 16 times next year’s estimates. The stock appears expensive considering the lack of revenue growth.

Bottom line

Amazingly, Ulta Beauty appears to offer the ultimate beauty shopping solution for a massively fragmented market. From department stores to drug stores to a direct seller such as Avon Products, the market has a vast amount of retail outlets that sell beauty products such as makeup, yet Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) is one of few with quality products situated outside of mall locations. What woman wants to trek out to the mall for a $15 beauty product that can be easily purchased at a more convenient non-mall location on the way home from work?

At 23 times forward earnings, Ulta now provides an entry point equivalent with its growth rate. Historically that valuation level has provided great entry points for fast growing companies.

The article The Ultimate Beauty Solution originally appeared on Fool.com and is written by Mark Holder.

Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool recommends Ulta Salon, Cosmetics & Fragrance. The Motley Fool owns shares of Ulta Salon, Cosmetics & Fragrance.

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