Ulta Beauty (NASDAQ) is America’s most well-known beauty retailer and the best destination to buy cosmetics, skin care, perfume, skincare and related products.

This company strives to offer unparalleled product variety, value and convenience in an exclusive specialty retail environment. (See Analysts’ Top Stocks on TipRanks)

Ulta Beauty has over 600 brand names, which allows it to diversify across many consumer buying power levels. This makes Ulta Beauty a popular choice for almost all target industries.

Although the beauty industry can be fiercely competitive, Ulta Beauty has a solid brand. Ulta Beauty should see an increase in sales and loyalty programs, which will help the company grow and improve its margins.

The stock is currently trading at a high price and has potential upside, regardless of its recovery from the lows in last year. The stock is a good investment.

Solid Performance

Cosmetics account for 44% to 40% of Ulta Beuty’s top-line revenues. Second are Skincare, Bath, and Fragrance Products, which account for 28% of total Ulta sales. Hairstyles and Styling Products accounts for about 20%.

It has managed to be a leader in all sub-fields within the beauty industry and have developed an amazing loyalty program. Members are encouraged to maximize the benefits of this loyalty program.

From 2016 to 2019, members grew by 23 million to 34 millions. While this dropped to 31million in 2020 due to the pandemics, it is still a positive trend that should continue once we get back to normal.

Ulta’s latest quarterly results show that the industry has seen a rapid recovery. Net sales increased by 60.2% in Q2 to $2 billion, compared with $1.2 billion during the same period last year.

Capital Returns and Valuation

Ulta Beauty’s capital returns in the past have come from stock repurchases. Except for a 2012 special dividend, Ulta Beauty has not paid any dividends.

Stock buybacks in 2020 amounted $115 million, compared to $681 million the year before. This was due to cash preservation during the pandemic. But stock buybacks have been strongly resumed as Ulta Beauty bought stock worth $243.5 million in the second quarter.

Ulta Beuty trades at approximately 24.4x its next 12-month Net Income (NTM), which matches its historical average.

The loyalty program, as well as online sales growth, have fueled a steady increase in gross margins. They grew from 35% to 42% in 2015, specifically.

If the company continues to experience positive growth, then the valuation multiple is attractive. Stock buybacks will help the company grow its EPS by double digits over the medium-term.

Wall Street’s Take

Looking at Wall Street, Ulta Beauty’s consensus rating is Moderate Buy. It was based upon 14 Buys and eight Holds as well as zero sells in the three-months preceding.

At $445.19, the average Ulta Beauty price target implies 16.9% upside potential.

Disclosure: At the time of publication Nikolaos Sismanis had not held any position in the securities listed in this article.

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