Ulta Beauty changed the beauty retail experience in the 1990s by offering a new way to shop. At the time, prestige, mass, and salon products were sold through distinct channels — department stores for prestige products; drug stores and mass merchandisers for mass products; and salons and authorized retail outlets for professional hair care products. 

Ulta Beauty changed the experience by offering multiple brands at multiple price points and now offers 25,000 products across 600 brands. Ulta Beauty has more than 1,350 stores plus more than 350 shop-in-shops in Target and boasts 40 million+ loyalty members. Its omnichannel approach allows customers to buy in the store, online or buy online and pick up at the store. In addition to its beauty products, the company offers many services at its locations, such as hair, waxing, and ear piercing.

Beauty care represents a growing market, is an important part of people’s lives and deemed worthy of investment. According to Ulta Beauty, about 65% of consumers believe beauty is connected to wellness. As a result, the beauty market is resistant, although not immune to economic changes. Ulta Beauty has about a 10% share of this $100 billion market which has grown about 2-5% annually.

Ulta Beauty has historically traded at a market premium, with a 15-year median price to earnings (P/E) ratio over 30X. The company currently trades at a discount to the market of 16.5X. This is not without reason. In the five years prior to the pandemic, the company averaged same-store-sales (SSS) growth of about 10%, but this had slowed to 5% in the last year. During the early pandemic period, sales fell off significantly but bounced back quickly in 2021 and surpassed 2019 levels, as consumers bought beauty products as part of returning to work and social events.

Strong sales continued last year at almost 16% but have slowed to 9% and 8% the 1st two quarters of 2023. The company has guided 5% SSS for the year- indicating even lower levels the 2nd half of the year. In addition to the slowing sales, margins have started to fall this year from last year’s peak and were guided lower. This is driven partly by competition. With the beauty market growing so rapidly, competitors did not discount items to gain share, but as the market slows there will be more discounting. Ulta Beauty plans to protect its market share although not drive the discounts.

Slowing sales and falling margins do not usually mean an investment opportunity, but Ulta Beauty maintains several drivers. The margins, while falling, are still expected to settle above the pre-pandemic rate at above 14%. This compares to the 16% earned last year and the 13% averaged in the five years prior to the pandemic. This is partially driven by more efficient shipping as the company’s “buy online and pick up at the store” gets items to the consumers faster and is also cheaper for the company.  

While sales are slowing, they are still growing. The company’s 40 million loyalty members still represent what the name suggests – loyal shoppers. And that membership continues to grow, up 9% year over year in the 2nd quarter to 41.7 million active members. In addition, the growing shop-in-shop Target stores offer more opportunities to grow the brand. Ulta Beauty also continues to add brands, such as exclusively LolaVie created by Jennifer Aniston in the 2nd quarter. Notably, some of the recent weakness in Ulta stock appears to reflect the difficulties beauty products competitor Estee Lauder is experiencing in Asia. It should be noted, however, that while consumer buying trends should not be ignored, Ulta currently only has US stores. Ultimately, Ulta Beauty can continue to grow earnings, which in turn should drive a re-valuation of the stock, perhaps not to the historical 30X earnings, but a market premium. This combination of potential earnings growth and multiple expansion results in a beauty of an investment.