Article Thesis

Ulta Beauty (NASDAQ:ULTA) is the leading operator of beauty chains in the United States, with 1,318 stores across the country. Although the business is maturing, Ulta still has several levers for continued shareholder returns: incremental store growth, on which they earn a 30% ROIC; leveraging a powerful brand to drive comparable same-store-sales (SSS) growth; and share buybacks. These three pillars of earnings per share growth are likely to drive high single-digit to low double-digit share price returns over the coming years. I prefer slightly higher annual return estimates and will start buying if shares go below $350.

Well-Defined Growth Strategy

Bricks-and-mortar retailers generally have two levers to pull for revenue growth: building out new stores and increasing sales per store. Ulta has been largely successful at both, which has helped drive exceptional growth.

Incremental Store Growth

Over the past three years, Ulta Beauty has averaged net new store growth of 3.5% per annum, even managing to grow their store count during the depths of the COVID-19 pandemic. Since building new stores are a large use of capital, delving into the store-level economics is useful.

It costs Ulta, on average, $1.4 million to open a new store, and NOPAT per store roughly equates to $750,000 per year (NOPAT / number of stores). Adjusting for incremental capital investments in stores, investments to support their supply chain, and working capital, Ultra’s ROIC works out to just over 30%. This is an extremely attractive internal investment profile and explains how Ulta was able to compound EPS at 20% annually over the past decade.

Ulta’s management has stated that they believe their market will not begin to saturate until they reach 1,500 to 1,700 stores in the U.S. (200 to 400 stores