Analyst: Ulta Salon Is A 'Category Killer'

In a new report, The Buckingham Research Group’s Kelly Halsor took a close look at Ulta Salon Cosmetics & Fragrance Inc ULTA’s latest upbeat earnings numbers. Halsor also explains why Buckingham believes that it’s time to buy the stock.

The numbers
Ulta’s Q2 earnings per share (EPS) of $1.15 came in ahead of consensus estimates of $1.12. In addition, the company reported better-than-expected comps of +10.1 percent and raised its fiscal 2015 and Q3 EPS guidance.
Halsor sees positive momentum for Ulta and believes that even the upped guidance remains on the conservative side.

Specialty beauty
The latest strong numbers from Ulta reinforce Halsor’s investment thesis concerning specialization within the category. “The fundamentals in the beauty category remain very strong and ULTA is gaining significant market share as women gravitate more toward the specialty channel for their beauty needs,” she explains.

Margin pressure?
The one bump in Q2 earnings was a 0.40 percent decline in gross margins for the quarter. However, Halsor explains that this slight downtick is likely due to temporary supply chain investments. Ultimately, she expects these investments to pay off by generating at least $7 in EPS for Ulta by 2017.

Outlook
Following the earnings report, Buckingham reiterated its Buy rating on Ulta and raised its price target from $182 to $187. The new price target is based off of 29x Buckingham’s 2017 earnings estimate of $6.90 discounted back one year based on the company’s weighted average cost of capital.

If the company maintains its five-year average multiple of around 30x, Haslo believes that inflections in both margins and free cash flow could drive the share price as high as $240 before 2018.