Takeaway: This is a trinary call. Pick a direction. Fast. That = Black Book.

I have roughly 20 names on my idea list. Every one has a different level of conviction at a given point in time. But the name that’s absent is the one I am asked about the most “Hey McGough, where’s your call on ULTA?”. I kid you not, that comes up in half of my meetings with clients – and I have not had an answer. YET. The debate is emotional – which is when I get really interested. Analysis wins over emotion (almost) every time. The point is that we’re going deep on this one. There are key questions to be answered about saturation, customer acquisition, change in cost of growth, business mix evolution, new vs old competition, eCommerce (asset vs liability), and the sustainability/upside with gross margins.

My sense is that the people who missed it at $100, then $150, then $200, then $250 are viewing this sell off as a way to recapture what they had to explain to their boss for missing last time around. But that often spells value trap. We’ve seen this story before. The outcome is tri-nary (the first time in my life I’ve used that word). Either…

  1. The ‘I missed it’ bulls, increasingly looking at the name, are setting up for the next spurt of sales and margin growth in one of the best names Retail has seen this cycle,
  2. The growth ramp is at a point where it’s hitting a wall (or maybe even just bumping against it), which de-levers Gross/EBIT Margin and squeezes cash flow – and tanks a 26x multiple (remember when Bed Bath was ‘the best concept and management team on the planet?’. Concepts and management teams are ‘the best of the best’, until they’re not. Or…
  3. This is a perennial value trap. It just went from a hyper-growth story to a growth story, then turns all GARPy on us, until it ultimately becomes a value stock. In other words, it trades +/- $20 of $200 for 5-years, wasting space for anyone who wants to look out past a TREND duration.

I’ve got about 70% of the info I need to answer this question – which to me = a consensus call with no edge. We’re well into the process of building new proprietary data sets and analytical frameworks to get us the extra 30% of the way there. We’ll present those findings in a Black Book the 3rd week of March.  More details to come.