Ulta Beauty Stock Analysis: The Good, The Bad and the Ugly
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- Опубликовано: 6 сен 2024
- Ulta Beauty has had exceptional growth to become the largest specialty beauty retailer in the U.S. with a presence in 50 states. However, its growth slowed down, and the question is - Will it re-accelerate? The share price of Ulta Beauty over the last 5 years is up only 15%.
This video covers my full analysis, including a Discounted cash flow (DCF) model.
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It caught Berkshire's eye. I happened to increase my position by 42% the monday before it became known Berhshire had a position. Talk about timing. I had been looking at it over the weekend and I could not find significant faults in my reasoning to buy it in the first place. We'll see where it goes. I was confident, now i am even more.
The folks at Berkshire Hathaway know what they are doing💄
The 1300+ stores does not include the 500+ target shop-in-shops. The partnership with Target didn’t start until 2021, which ULTA had already reached 1300 store count. Revenue estimates will need to include both the target shop-in-shops and their own stores.
This is not how I read their estimate. I do expect them to have 1,300+ shop-in-shops (out of which 500 are already there).
In addition, there's their own free standing stores.
Ulta beauty is $340 today. I’m reaaaaaaally interested.
I wish you lots of success :)
Really interesting video. Thanks for the analysis, i didn´t knew about the bad work enviroment. I looked at Ulta in May and what i´ve gathered the management sees a store limit in the US around 1.500 to 1.700 stores (bath and Body Works have around 1.750 stores, sephora has around 1.500). Their store target is 50 per year. So with this rate they would reach their absolute store limit in 2031. I think its reasonable to assume a 5%-7% growth rate (their long term target) till 2031 and then assume a growth rate same as inflation without international expansion. There i have the same concern as you, it is a totally different enviroment and lots of different competitiors. I really like that they are always up to date with new cosmetics brands for example they were the first retail store to offer Kylie Cosmetics.
Thank you for sharing and I am glad you enjoyed the video.
Ulta partners up well and next year they will start expanding into Mexico with a strong international partner 💄
Excellent video!! 💄
Thank you!
Great video!! Could you please also share how you came up with the discount rate?
@@SuperParaag I use WACC as a starting point. However, if the beta is unreasonable, I make an adjustment for it. For example, after the pandemic, Zoom had a negative beta, which doesn’t make much sense in the long run.
Can you explain a bit more how your models works? Where is the D&A add-back and the changes in NWC and capex to reach FCF?
Hi there, thank you for the question. I'll share my answer below, but if you want to learn more, there's a free valuation course that you can find on my channel.
In theory, if a company doesn't grow, the capex would be equal to the D&A, so that the existing assets are being replaced. If you notice, the starting point of my model is the operating profit. Instead of adding D&A, and then subtracting capex to maintain the level of existing assets, I don't subtract the D&A in the first place. So, for a business that's stable over time, the capex required is covered.
The next part is all about a business that is growing. Based on the historical data, a so-called "Sales/capital ratio" can be calculated. This answers the question: How much capital is required, to support $1 in sales. In the case of Ulta, this ratio is 3. So, if the sales grow by $3,000, Ulta needs to invest $1,000 to support this. It is not only in long-term assets, but also in working capital. This additional investment, is the "Reinvestment" line of the model.
I hope this makes sense. If you have more questions, please let me know.
Good video. I would be intereted in your thought on CHGG
Thank you for the suggestion Victor.
Great video! How much do you think Buffet paid for Ulta Beauty?
I'm glad you enjoyed the video. The exact price isn't known, but we do know that it happened during Q2, so it can be anywhere between $370 to $530.
if the expected cagr% is so weak, i do not get why Warren Buffet has invested in Ulta
Therea are a few points to consider:
1. Buffett isn't the only one making the calls now.
2. Ulta is a relatively tiny position.
3. It is not the first time for Berkshire to invest in a company that has similar fundamentals. I can see some similarities with Floor & Decor.
I like your points about international expansion possibly being overestimated.
I believe that the concerns about competition are also valid. Investors are watching elf grow at a faster pace than Ulta, taking market share. Inflation pushing customers to less-expensive elf.
Also, I bought more Ulta today.
Thank you for the feedback. I wish you a lot of success with the position!
@@kostadin_ristovski Sentiment seems sufficiently negative on the company that I’m a buyer.
Beauty products are categorized as consumer discretionary but people don’t actually stop buying them in economic downturns. For me it’s a portfolio diversifier, uncorrelated to the stuff I usually put money into, and tho it has large potential downside risk (that’s equity investing), there’s significantly less downside risk than with most companies. Is my guess.
Ulta is retailer and Elf is a beauty maker. Ulta sells Elf. Unless Elf’s DTC increases a ton, it is not going to have negative impact on Ulta. The Same can be said on every beauty maker
you should do WD-40 next 😭
Thank you for the suggestion!