An impressive quarter from ULTA. The category is doing great, dressy apparel/footwear that has been outperforming in 1Q, it makes sense beauty would see some further restocking by consumers as well, especially as foot traffic to stores is returning. ULTA delivered 18% comps with transactions up 10%, driven by store traffic with ticket up 7.3%. Management noted NPD data suggesting it gained share in prestige beauty in the Q. Top line strength meant cost leverage and the channel shift to stores aided margins, while like for like merch margin was down YY. The company lowered marketing spend this Q, but ramped corporate expenses around other initiatives while store labor leveraged from sales upside. We can’t take anything away from the company on 1Q performance, good execution in a good category. But as we look forward, the growth algorithm for ULTA is likely to deteriorate VERY MATERIALLY. Sales are highly likely to slow as consumer spending sees pressure and competition ramps. Major players like Amazon and department stores are vying for share, as Kohl’s continues its Sephora rollouts with 200 today still planned to ramp to 850 over a couple years. The company acknowledged promotional intensity is likely to build, and it will do what is has to to protect share. When combined with rising wages and investment spend, that means margins are likely to revert lower. It all builds to a low to mid single EBIT growth assuming the category is healthy and the company can continue to execute. That’s not worth the 20x+ multiple this name has today and carried back in the day when it still had years of outsized growth in a growth starved retail sector. Over the next year this name is likely to have another moment like it had in 2019 when the PE multiple was slashed by a third in a couple months time when the market got a whiff of a weaker growth profile. We’re hard pressed to find the incremental buyer on a name where a massively eroding growth algorithm is trading at such an inflated multiple. Best Idea Short.
Takeaway: Evaporating unit growth, competition rising, sales to slow, margins to revert, EBIT growth to stagnate. All in not worth its 20x+ multiple.
