Review of Ulta Beauty: retail stores for self-care

Обзор Ulta Beauty: розничные магазины для заботы о себе

Ulta Beauty (NASDAQ: ULTA)— company, Manager of specialized retail stores, who are engaged in the sale of cosmetics, Perfumes, hair and skin care products, as well as related accessories and services. In total, the network offers about 25 000 Goods, including Ulta Beauty's own brand and Ulta Beauty collection. These stores also have beauty salons.. The company operates 1302 stores in 50 States.

About company

In Russia, the company's shares are traded on the St. Petersburg Stock Exchange with 31 August 2017, Having ticker ULTA. Shares show significant medium-term growth.

history of the company. Ulta Beauty was founded in 1990 under the name Ulta Salon, Cosmetics and Fragrance. The founders were Richard E.. George, former president of Osco Drug, and Terry Hanson.

George left his job at Osco in 1989., focusing on writing a business plan for your own company. The business plan included a new retail concept, offering goods of different price segments. Other Osco executives later joined George and Hanson to raise $11.5 million in venture capital..

The second half of the nineties was a time of personnel changes. In September 1996, Hanson hired Charles "Rick" Weber., another former Osco employee, as Chief Financial Officer. Hanson later became president of the company..

In December 1999, Lyn Kirby, formerly of Sears Circle of Beauty, became President and Chief Executive Officer, and Weber becomes Senior Executive Vice President, Chief Operating Officer and Chief Financial Officer. They ran the business together until then., until Weber left the company in September 2006, choosing a similar position in another firm.

25 October 2007 the company became a public issuer on the Nasdaq exchange. In 2008, Ulta Beauty opened a second distribution center in Phoenix, state of arizona.

In 2010, there were another personnel reshuffle: 26 April 2010 Ulta announced, that Carl "Chuck" Rubin will be appointed Chief Operating Officer, President and Member of the Board of Directors.

Since 2009, the company began to participate in charity events in favor of women. It cooperates with such American organizations., as Dress for Success, Save the Children, Big Brothers Big Sisters. The company also began to sponsor breast cancer research.

By 2017, the company's profit grew to 269 million per year, the range of goods in its warehouses exceeded 20 thousand, and brands - over 500.At that time, she became famous for her gender and racial tolerance, the vast majority of staff were women, and almost half are African-American women and other non-white residents of the United States. In the same year, the company rebranded, changing the name to the current one – Ulta Beauty.

Composition of the group of companies. The group consists of four companies, three of which are registered in Delaware due to the peculiarities of local tax legislation. At the same time, the group includes a company under its original name Ulta Salon., Cosmetics & Fragrance, which has not disappeared anywhere, but was simply absorbed by the newly formed parent company.

Shareholders. The percentage of shares in free circulation is quite low compared to the norm - this is a negative factor for the attractiveness of the company's securities. At the same time, we can not but rejoice at the fact, that among institutional investors and funds, the largest share belongs to The Vanguard Group, which is positioned as one of the largest investment companies in the world.

Key figures. Consider the three main persons of the top management of the company. David K. Kimbell — President of the company since December 2019, previously served as Director of Merchandising and Marketing since March 2015 and Marketing Director since February 2014. Prior to joining Ulta Beauty, he was Chief Marketing Officer and Executive Vice President of U.S.. Cellular since February 2011.

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From 2008 to 2010, Kimbell served as Chief Marketing Officer and Senior Vice President of Seventh Generation., manufacturer of environmentally friendly products for home and child care.

Before, from 2001 to 2008, Kimbell has held various positions at PepsiCo., Quaker Food Division, including Vice President of Marketing. He also held a number of brand management positions in the beauty department of Procter and Gamble from 1995 to 2001..

Mary N. Dillon has been Chief Executive Officer since July 2013. Prior to joining Ulta Beauty, she was President and Chief Executive Officer., and CEO of U.S.. Cellular – June 2010 to July 2013. From 2005 to 2010, Dillon served as Director of Global Marketing and Executive Vice President of McDonald's Corporation..

Prior to joining McDonald's, she held various positions at PepsiCo., including president of Quaker Foods. Member of the Board of Directors of Starbucks Corporation and KKR & Co, and previously served on the board of directors of Target Corporation.

Scott M. Settersten has been the company's Chief Financial Officer and Treasurer since March 2013. Previously Acting Chief Financial Officer, prior to that, he served as Vice President of Accounting. He joined the Ulta Beauty team in January 2005 as Director of Financial Reporting.. Prior to joining Ulta Beauty, Settersten worked 15 years at PricewaterhouseCoopers LLP as a Certified Public Accountant, also engaged in risk management.

Geography of stores. Retailer stores are in all 50 U.S. States, but the greatest concentration is in the regions with the highest purchasing power of the population: In the Northeastern United States, in California, a number of major cities and their environs in the center of the United States and in Florida. California has the largest share. This can be attributed to the increased demand for beauty products in the region.: suffice it to say, that there is a notorious Hollywood in the state, and Los Angeles is considered one of the world capitals of the modeling business.

The geographical distribution of the group's stores is dictated by demand, and it can be considered a positive factor for the attractiveness of investments in the issuer's shares.

For 9 2021 the company opened 42 new store. At the end of the third quarter of fiscal 2021, Ulta Beauty operated 1302 stores with a total area of 13.7 million square feet., in the third quarter it opened seven new stores, located in Arden, Atlanta, Batavia, Greensboro, Hickory, Ithaca and Johnstown.

What he earns

Brands, income structure. The group of companies has more than 400 brand partners. Leading brands, which account for 61% selling, is Estée Lauder, L'Oréal and Shiseido. The total number of brands exceeds 600. They include their own trademark Ulta Beauty. In the company's promotion program as of 30 January 2021 was attended by more than 230 brands.

Sales structure by product groups by year

2018 2019 2020
Cosmetics 51% 50% 44%
Body Care, Spa, aromatic products 21% 22% 28%
Hair care products 19% 19% 20%
Services 5% 5% 3%
Accessories & More 4% 4% 5%

For 9 months of 2021 the sales structure has changed slightly. In second place came products for hair care. It can be assumed, that in the most critical time of the COVID-19 pandemic, people, recovering from coronavirus infection, took on the advice of trichologists measures to protect hair from hair loss.

But in the future, as the COVID-19 wave subsides, demand has shifted again towards products for the care of the skin of the body. The company's business was extremely susceptible to the pandemic factor, this is the main, what has influenced him lately. The increase in the proportion of aromatic products and products for baths can be explained by, that spas reopened in 2021, many of which were closed during the most critical period.

Sales structure by product groups for 9 Months

2020 2021
Cosmetics 47% 44%
Hair care products 20% 20%
Body Care Products 17% 17%
Aromatic products, bath products 9% 12%
Services 4% 4%
Accessories & More 3% 3%
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Financial indicators

In 2020, all financial indicators showed a decline, whereas in previous years they grew. Data, On the one side, Show, how vulnerable the company's stock may be to the pandemic, but, On the other hand, we see, that the company did not go into the red, all results were positive.

That, that the company remained afloat, can be explained by the growing popularity of home cosmetology in the conditions of lockdown. And now many are afraid to go to beauty salons because of the risk of infection., preferring to independently organize "salon procedures" at home and buy the necessary funds in retail outlets. At the same time, in the conditions of self-isolation, the company's online sales grew only in the second quarter of 2020 by 200%. In this way, the company still showed at least some stability..

During the period 9 months of 2021 there was a sharp increase in financial performance. This is easily explained by the general recovery of the market and the lifting of the lockdown., plus the demand for cosmetics was driving relief, and in some states, the complete abolition of the mask regime. The meaning of this event is quite clear: American women began to pay more attention to the beauty of their faces, previously masked. Mask mode canceled, in particular, in California, Texas and Florida, where are most of the company's stores.

If we take the results of the third quarter of 2021 and compare them with the same period of the previous year, then their growth will be more modest. The reason is, that in the third quarter of 2020 there were no such crisis phenomena, as in the first half of the year.

In the third quarter of 2021, experts at the federal level announced new anti-records of the pandemic, which caused a decrease in store attendance due to fear of infection.

At the same time, the introduction by the US Treasury of extraordinary measures to prevent default, which was accompanied by the panicked public rhetoric of its leadership. After these performances, many Americans, naturally, began to spend less money on such goods, as cosmetics, fearing the onset of a rainy day.

Financial indicators by year, one thousand dollars

2016 2017 2018 2019 2020 Change 2020–2019
Net sales 4 854 737 5 884 506 6 716 615 7 398 068 6 151 953 −16,84%
Gross profit 1 747 229 2 096 809 2 409 311 2 681 064 1 949 159 −27,30%
Operating profit 654 824 785 291 854 080 901 094 236 820 −73,72%
Diluted earnings per share 6,52 $ 8,96 $ 10,94 $ 12,15 $ 3,11 $ −74,40%
Basic earnings per share 6,55 $ 9,02 $ 11 $ 12,21 $ 3,12 $ −74,45%
Profit before tax 655 714 786 859 859 141 906 150 231 085 −74,50%
Net profit 409 760 555 234 658 559 705 945 175 835 −75,09%

Financial performance for 9 Months, one thousand dollars

2020 2021 The change
Net sales 3 953 252 5 901 501 49,28%
Gross profit 1 178 131 2 341 225 98,72%
Operating income 12 548 921 870 7246,75%
Profit before tax 7276 920 674 12553,57%
Net profit 4341 696 471 15944,02%
Basic earnings per share 0,08 $ 12,68 $ 15750%
Diluted earnings per share 0,08 $ 12,6 $ 15650%

Financial performance of the group of companies in the third quarter, one thousand dollars

2020 2021 The change
Net sales 1 552 033 1 995 775 28,59%
Gross profit 545 519 789 474 44,72%
Operating income 101 277 284 239 180,66%
Profit before tax 99 894 283 826 184,13%
Net profit 74 798 215 289 187,83%
Basic earnings per share 1,33 $ 3,97 $ 198,50%
Diluted earnings per share 1,32 $ 3,94 $ 198,48%

Plans and prospects

At the end of the third quarter, the company raised its forecasts for the results of 2021. If the predictions come true, it is necessary to expect a significant increase in the value of shares in the near future. Instead of $8.3 billion in net sales, $8.6 billion is expected, instead of 13% operating margin — 14,5%, instead of 14,70 $ diluted earnings per share — 17,10 $. Expected, that the total amount of share buybacks for the year will be $ 850 million.

Last October, the company outlined its strategic priorities and financial goals for the period 2022 to 2024.. Much attention is paid to speeding up the delivery of orders, made on the Internet through the beauty to go service. With the help of this service, orders will be ready for delivery in less than two hours, delivery will be carried out on the same day.

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This decision is relevant due to two factors.: Firstly, no one knows, what to expect from the development of the situation with the pandemic, may be, next restrictions on leaving the house, and secondly, Sephora, company competitor, launched and patented a delivery service during the day. Success of beauty to go service, undoubtedly, will have a positive impact on the value of the company's shares.

Besides, Ulta Beauty plans to open annually 50 new stores in the USA. Plans for international expansion remain in force, although in 2020 the company refused to open stores in Canada due to the crisis situation. Emphasis as in the US, so overseas will be made to stores of 5 thousand square feet, focused on small markets.

In the field of Internet technologies, it is also planned to partner with Google and YouTube in the field of creating a virtual tool Ulta for trying on lipstick and eyeshadow for the ages of different brands. Ulta also announced a strategic investment and partnership with Adeptmind, a company., engaged in retail artificial intelligence technologies, – in order to create a new personalized search engine for the "digital store of the future".

The company is also launching a new business called UB Media., retail media network, which Ulta brand partners can use to advertise on the retailer's website and app, as well as external sources, such as Facebook and Instagram.

In this way, company development plans, its focus on e-commerce in the face of a protracted pandemic and on expansion into small local markets and abroad can be called attractive to investors.

Risks

Certainly, the main risks are related to the ongoing COVID-19 pandemic and the economic crisis in the United States, which jeopardize the demand for cosmetics. But there is a risk., which the company's management also sees in the short term, is the challenge of ensuring that there are enough inventories to meet demand.

Delivery delays are common today. The situation may be aggravated by an increase in the number of cases of infection with the virus. The risk is leveled by, that the company has specifically accumulated an excessive amount of goods in the warehouses of stores.

conclusions

Ulta Beauty showed very strong results for 9 the months of 2021 and the third quarter of 2021. Plans to expand and improve financial results give investors the opportunity to count on further growth of its shares. However, you also need to look closely at the situation with risks., since we have already seen, how the main stage of the pandemic has dealt a blow to the company's financial performance. Although it did not go into the red., that didn't save its stock from declining..

Due to the emergence of new strains of coronavirus, there is no guarantee, that the situation of 2020 will not be repeated. The high infectiousness of the omicron strain in comparison with the previous ones gives every reason to believe, that it is quite possible to repeat the strict restrictions on the work of retail outlets and panic among Americans about visiting public places.

This risk is slightly offset by investments in strengthening the e-commerce system and in the introduction of a same-day delivery system., but the main competitor of the company also introduces this system. The overall situation in the industry is complicated by americans' fear of the threat of a state default.: not up to cosmetics, when food and soap should be set aside. Penetrating foreign markets is a good idea, but first, apparently, Canada is considered, where economic and pandemic challenges have been joined by political challenges.

Investors should focus not only on technical analysis stock dynamics, as many non-professional retail investors do, but also on the combination of these external factors, which may affect this dynamic.

In an unfavorable situation, it is better to get rid of the already purchased shares of the company at least for a while., until they fell. Should be considered, that with all the well-being of the company's financial performance, the cosmetics industry is very vulnerable to external circumstances.

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