Ulta Beauty is a nearly $12 billion business. And 95% of this comes from one source.
This is a key point that investors seem to have forgotten, which is why this is a great opportunity.
It has approximately 1,400 branches, Ulta Beauty (Ulta -1.31%) It is one of the world’s largest cosmetics retailers. This year, management expects the company to generate at least $11.5 billion in net sales, which is huge.
In addition to its widely sold products, Ulta Beauty also sells exclusive products that are only available in its stores. In addition to selling cosmetics, we also provide in-store services such as hair and nail salons. This combination of products and services sets us apart from some of our competitors and keeps customers coming in.
I readily admit that I am not a customer and cannot offer personal anecdotes to explain Ulta Beauty’s success. That is, if you look at it from the side, you can recognize something special. As of the first quarter of 2024, the company had over 43 million active loyalty members, and this didn’t happen out of thin air.
To be clear, the term “loyalty” isn’t just an empty label for Ulta Beauty members. These customers are very loyal to your brand. By 2023, a whopping 95% of the company’s sales will come from 43 million shoppers.
That is, anyone ~can do Drive to an Ulta Beauty store and enjoy some shopping. However, the majority of the company’s revenue comes from just one source: its loyal members. And this is very important to the investment thesis today.
Why Buy Ulta Beauty Stock?
For those who don’t know, many investors seem to be afraid to buy Ulta Beauty stock right now because these are difficult times from a competitive standpoint.
Earlier this year, Ulta Beauty executives forecast 2024 net sales of $11.7 billion to $11.8 billion. This would have only been about 4-5% sales growth compared to 2023. However, in the first quarter, management cut annual revenue. It is expected to be between $11.5 and $11.6 billion, which is a much more modest growth.
The cosmetics field has relatively low barriers to entry. Celebrities can and often do launch their own product lines. This quickly catches the attention of fans. And beauty products are perfect for viral social media marketing. Simply put, a newcomer could come in and quickly steal Ulta Beauty’s sales.
In addition to these threats to market share, Ulta Beauty executives note that 2024 is a slow year for growth for the overall category. Simply put, there is no rising tide to lift the ship, and other players are actively trying to sink it.
This may be causing investors to hesitate to buy Ulta Beauty stock. As a result, the stock price has fallen to unusually cheap levels, as you can see in the chart below.
ULTA PS Ratio Data from YCharts
If Ulta Beauty is on the verge of irreversibly losing market share to rising stars in the cosmetics space, there would be good reason to avoid investing in the stock, even if its stock price is cheap. Cheap stocks are not good buys when business is in decline.
But investors should remember that nearly all of Ulta Beauty’s revenue comes from loyal members. So it’s reasonable to expect the company to retain at least most of the business it currently has. If so, Ulta Beauty is a cheap stock worth seriously considering buying now.
Ulta Beauty management is quickly taking advantage of the cheap stock price. The company spent nearly $300 million on stock buybacks in the first quarter, the most it has ever spent in a single quarter of a year. And management has the authority to spend another $1.8 billion at its discretion. Considering the stock is still cheap, we wouldn’t be surprised to see management continue to move quickly.
This is great for shareholders. In a letter sent in 2022 Berkshire Hathaway Warren Buffett said, “If a company overpays for share repurchases, existing shareholders will lose.” There was much more to Buffett’s point in the letter here. But suffice it to say that buybacks usually work better when stocks are cheap, as was the case with Ulta Beauty.
Ulta Beauty’s sales are more resilient than you might think, thanks to its 43 million loyal members. Investors seem to have forgotten this, so stock prices have fallen to cheap levels. This is actually good for shareholders because management can repurchase stock at a low price. But this is also an opportunity for retail investors to buy shares of Ulta Beauty at an attractive price for the long term.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Ulta Beauty. The Motley Fool has a disclosure policy.
