Quick Summary

Ulta Beauty is the largest specialty beauty products and services retailer in the United States, selling over 25,000 products in the cosmetics, fragrances, skin, and hair care segments from just over 1,250 store locations. 84% of sales are from product sales in its retail locations, 11% are from e-commerce sales, and 5% of sales are from services at its in-store salons. Ulta's largest product category is cosmetics (51% of sales), followed by skincare/bath/fragrance (21%), hair care and styling products (19%), nail care/accessories/other (5%), and salon services (5%). Ulta runs a large customer loyalty program called Ultamate, with over 34 million members.

Does The Company Have Recurring And/Or Rising Revenues?

SOMEWHAT. Ulta has generated impressive sales growth for such a large retail firm, averaging 15% annual revenue growth over the past 3 years. This has been accomplished by opening about 100 new stores a year, generating high single to low double-digit percentage same-store sales growth, and rapidly ramping up its e-commerce operation, which has grown at rates exceeding 30% annually. However, future growth prospects remain unclear. Management sees a store cap of 1,500-1,700 stores, meaning the company is very close to saturation already. Relying on e-commerce for growth puts Ulta in a more competitive market with fewer differentiating options. On the recurring side, we don't generally consider retail sales to be recurring revenue, although Ulta's product categories are primarily short-term consumables that are recession-resistant and generate strong consumer brand loyalty. This is an "ok" revenue profile, not a great one.

Does The Company Have Durable Competitive Advantages?

NO. The salon and beauty industry in the U.S. is huge (over $100 billion) but incredibly fragmented, with small salons, general retailers, competing specialty shops, and even drug stores selling the same or similar products. Online, the competition is even more competitive, with everyone from Amazon to specialty operations to the brands themselves selling similar products. Ulta is no weakling competitively. Its large distribution footprint and brand (Ulta controls 12% of the U.S. retail beauty market) give it access to exclusive products and leading brands, and its 34 million-member loyalty program helps retain customers. Still, this isn't enough to earn it economies of scale advantage, as competitors like Walmart and CVS do even more volume in the category. Ulta has a solid competitive footing but nothing durable enough to stand out or protect it long-term.

GreenDot Rating: YELLOW

Ulta is a good example of a YELLOW (somewhat attractive) business model. There are good and bad things about the company. On the good side, it has a strong scale and brand in an enormous, fragmented consumer market where products need frequent replacement and generates good brand loyalty. On the bad side, it faces a lot of competition with few truly durable advantages and is nearing an inflection point where revenue growth rates will become unattractive for many investors. Long-term, we see Ulta as a steady performer that rewards its shareholders with cash flow driven returns like buybacks and dividends - not the revenue growth that has long been its main attraction.