Ulta Beauty is in the Eye of the Beholder – C-Suite Transitions

Ulta Beauty (ULTA): $404.06

Market Cap: $18.73B

EV: $20.69B

Ulta Beauty has established itself as a leading name in U.S. beauty retail, offering an extensive range of cosmetics, skincare, fragrances, and haircare products. With 1,437 stores across all 50 states and a robust online presence, the brand appeals to a diverse customer base by providing both high-end and affordable beauty products.

Unlike SEPHORA , owned by LVMH, and known for its global presence and luxury focus, Ulta remains U.S.-based and caters to a wider price spectrum. In a competitive market that includes @Sally Beauty Holdings (SBH), which specializes in professional-grade beauty supplies, Ulta stands out with its inclusive product offerings and in-store services, effectively reaching a broader audience.

Key Insights

• Growth Projections: Ulta targets double-digit EPS growth by 2026, despite providing weak guidance for FY2024 and FY2025.
• Store Expansion: Over 70% of capital expenditures are directed towards store expansion, up from 50%, with investments expected to yield over 20% returns.
• Revenue Growth: Net sales increased by 1.7% last quarter to $2.53 billion, primarily driven by new store contributions, though growth has decelerated compared to previous years.
• Long-Term Vision: Ulta plans to expand its store count to over 1,800 U.S. locations and enter the Mexican market by 2025 via a franchising model.
• Buyback: Ulta Beauty’s aggressive share buyback strategy has reduced shares outstanding by 13% over the past three years.
• Valuation: With a forward EV/EBITDA ratio of 11.81, P/E ratio of 16.82, and price-to-sales ratio of 1.66 the stock appears reasonably priced, especially if its nascent franchising model works.

Key Metrics

• Comparable Store Sales: In the third quarter of fiscal 2024, comparable sales, encompassing stores open for at least 14 months and e-commerce, increased by 0.6%, down from a 4.5% rise in the same quarter of fiscal 2023. This growth was driven by a 0.5% increase in transactions and a 0.1% improvement in average ticket size. Ulta expects modest growth in comparable sales for the fourth quarter and operating margins to land above the high end of its previously estimated range of 11.6% to 12.4%.
• New Store Openings: Ulta opened 57 new stores during the first nine months of fiscal 2024, with plans to open approximately 200 more U.S. locations between 2025 and 2027.

Ulta’s Business Model

Ulta Beauty’s business model is built around an omnichannel strategy that combines brick-and-mortar stores, e-commerce, and digital platforms to meet customers wherever they shop. This mix of retail sales, in-store salon services, and a growing online presence keeps revenue steady and shoppers engaged. By seamlessly combining physical stores, digital platforms, and loyalty-driven initiatives, Ulta has carved a unique niche in the beauty market. Ulta’s expanding e-commerce platform contributes significantly to its revenue.

Loyalty Program

The company also benefits from its loyalty program, Ulta Beauty Rewards, which encourages repeat business through exclusive discounts and rewards. Ulta Beauty’s loyalty program is notable for its points system, where customers earn points for every dollar spent.

Ulta Beauty plans to expand its industry-leading loyalty program from 40 million members to 50 million by 2028. With a retention rate exceeding 70%, the program is highly effective. Engaging loyalty members through various channels, such as the mobile app or in-store salon services, significantly boosts sales.

While the company continues to prioritize growth and customer engagement, some investors have adjusted their positions, reflecting a mix of optimism and caution.

Warren Buffett’s Divestment

In the second quarter of 2024, Warren Buffett’s Berkshire Hathaway acquired approximately 690K shares of Ulta Beauty, valued at around $266 million.

However, by the third quarter, Berkshire reduced its stake by over 95%, holding only about 24,000 shares. This significant divestment occurred amid a broader strategy to increase cash reserves, which rose to a record $320.3 billion, predominantly held in short-term Treasury bills.

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Headwinds – Highlighted by CEO Dave Kimbell in Q3 2024 Earnings Call

• Moderation in Prestige Beauty Growth: Prestige beauty growth has slowed compared to previous quarters, with certain subcategories facing more significant challenges. CEO Dave Kimbell noted, “The prestige beauty category is growing, but at a slower pace than we’ve seen in recent years.”

• Evolving Consumer Spending: Guests are prioritizing core categories like skincare and fragrance, with softness in others. Kimbell remarked, “Spending is more thoughtful in this dynamic environment.”
• Pressure on Margins: Higher promotional activity, a common trend during challenging macroeconomic times, has put pressure on margins.
• Competitive Market Dynamics: The beauty sector remains highly competitive, with other players vying for market share.

One of the primary concerns for Ulta Beauty is the intensifying competition. Ulta Beauty faces increased competition, particularly from Sephora’s rapid expansion of beauty shop-in-shops within Kohl’s, ?which has pursued a swift expansion to the department store’s full 1,200-door footprint. In contrast, Ulta was in just 500 Target stores and is focusing on expanding its wellness offerings and attracting newer demographics, including young men, to boost market share.

CEO Transition: Amidst Challenges

In the midst of these headwinds, Ulta Beauty announced an unexpected leadership transition, that Kecia Steelman , the current President and Chief Operating Officer, will succeed Dave Kimbell as CEO, effective immediately. Kimbell, who served as CEO since 2021 will remain as an advisor through June 2025.

Steelman, a company veteran since 2014, was instrumental in leading Ulta’s partnership with Target and was named President and COO in 2023. Her appointment marks Ulta’s second consecutive internal CEO transition in just under four years.

However, with Ulta’s shares down over 15% in the past year, it is clear that the company’s next steps will be crucial to regaining momentum.

Check out the full article including our list of 43 sudden departures at public companies on InsideArbitrage below:

https://www.insidearbitrage.com/2025/01/ulta-beauty-is-in-the-eye-of-the-beholder-c-suite-transitions/