RiverPark sees a value in Ulta Beauty Inc (NASDAQ:ULTA) despite the company was a detractor for the fund for the quarter. In its Q1 Investor Letter, RiverPark discussed its investment thesis on ULTA. The fund said that the company is “the largest beauty retailer in the U.S. with over 1,000 specialty stores that provide a one-stop shopping experience” and has favorable customer demographics and “a differentiated retail format, which has been taking share in the fragmented $70 billion beauty products market.” Let’s take a look at the fund’s thoughts on ULTA.
ULTA shares were also a detractor for the quarter as investors continue to fear that the company is losing competitive positioning within the beauty retail industry. This extended the period of underperformance for ULTA’s shares which, despite a strong stock market in 2017, declined over 12% last year. While competitive issues are not new to this category or the company, this narrative has resulted in a dramatic decline in ULTA’s valuation over the past year (from over 30x next year’s earnings to less than 20x) that gave us the chance to initiate and continue to build our position in what we believe to be one of the few growth winners in the new retail bricks and mortar landscape.
Despite the increased focus of other retailers (both discount and department stores) on the beauty sector as well as on-line competitors (such as Amazon) over the past several years, ULTA’s results have remained exceptional with revenue compounding in excess of 20% per year since 2010 with same store sales growing double digits annually during this time. There has been little deceleration in these results of late as the company reported 9% growth in same store sales, and revenue and EPS grew 23% and 22%, respectively, in the company’s most recent quarter. ULTA has become the largest beauty retailer in the U.S. with over 1,000 specialty stores that provide a one-stop shopping experience including prestige, mass and salon products while also offering a full suite of salon services. The company has favorable customer demographics (high income consumers) and a differentiated retail format, which has been taking share in the fragmented $70 billion beauty products market.
Management has executed extremely well, delivering consistent annual revenue growth while also expanding margins, which has resulted in a 28% compound annual EPS growth rate over the past five years. The company will also be a major beneficiary of tax reform as its tax rate is expected to decline over 30% for 2018 and beyond. The stock’s underperformance, combined with strong fundamentals and a materially lower tax rate has brought the stock’s forward valuation down from a peak of over 30x forward earnings during 2016 to what we project to be under 15x earnings based on our estimates for one-year forward earnings. We built ULTA into a core position during the later months of 2017, added to our position again during the quarter, and would look to add further during 2018 should this value/growth divergence continue.
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Ulta Beauty Inc (NASDAQ:ULTA) is a chain of beauty stores headquartered in Bolingbrook, Illinois. The company sells cosmetics and skincare brands, men’s and women’s fragrances, and haircare products.
On Friday, ULTA closed down 1.50% at $253.06. Its opening price on the last trading day was $255.23. The stock declined 16.55% over the past 12 months, while its year-to-date performance jumped 11.88%. Over the past six months, the stock gained 18.87%.
Meanwhile, ULTA isn’t very popular stock among hedge funds tracked by Insider Monkey. The stock was held by 34 funds in their portfolio as of the end 2017.
