Ulta Beauty: Fundamentals and Valuation
Ulta Beauty ULTA 0.00%↑ has massively outperformed the S&P 500 over the last decade with a 20% CAGR. In this time frame, revenue grew at a 15% CAGR, Operating income 17.7% and EPS 23.5%. The company, however, is facing several challenges now and has to reimagine itself. This is the second part of my Ulta analysis; you can find the business model analysis here.
The big problem
The chart below illustrates my problem with Ulta Beauty: The store network is maturing. While the last decade saw explosive growth and quadrupling of earnings, much of that is attributable to opening new locations. Ulta currently operates 1374 stores and is barely opening new stores. In the 2021 Investor Day, management guided with a long-term potential of 1500-1700 stores in the US, between 9 and 23% growth until maturity. This massive deceleration means that growth needs to come in other ways. SSS are still growing nicely, but it’s tough to outgrow a market projected to grow by 2-4% without new stores. Ulta will gain an incremental share of customer wallets and another 1% per year in new store growth. Stores take a few years to mature, so the existing store network will experience operating leverage, pushing margins up. The big question mark is international expansion.
The Mexico opportunity
While writing this article, Ulta published its full-year 2023 results and announced something I was curious about: International expansion.
We have evaluated various operating models and partners, and geographies, and we are excited to announce the formation of a joint venture with Axo, a highly experienced operator of global brands, to launch and operate Ulta Beauty in Mexico in 2025.
Ulta CEO Kimbell, FY 23 report
The Mexican beauty and personal care industry is worth $11.3 billion and is expected to grow by 6% through 2029, showing an attractive opportunity for Ulta to start an international expansion. With 126 million, the Mexican population is also significantly larger than the other obvious expansion choice, Canada. While I’m excited about this opportunity, it will take some time until they act on it in 2025. It will take years and hundreds of millions in investments to find out if the Ulta Beauty playbook works internationally.