We’re gaining confidence in Ulta Beauty (ULTA) short side, and are taking it higher on our Short Bias list. Next move is likely to Best Idea status – pending conviction change in the model or near-term price level. Last week ULTA made the decision to postpone its expansion into Canada, which is definitely negative on the margin. The company will incur lease termination costs between $55mm and $65mm – though the real bearish part of this relates to unit growth – or the lack thereof. Don’t get me wrong, I was bearish on the move to Canada in the first place – as it’s a clear sign that it is running out of quality unit growth in the US. ULTA currently has ~1,200 stores, and says it has long-term plans to get to 1,500-1,700 in the US. I call foul on that goal. There simply aren’t enough high-quality MSAs to achieve those numbers without cannibalizing existing store sales. As unit growth slows, so goes the multiple – and at 20x recovery earnings (27x NTM), there’s not much room for a slowdown in growth. The company is hitting the brakes on Canada to focus on its US operations – which makes sense given the headwinds its facing in its home market with shoppers shifting to margin-dilutive online shopping. In the US it will be opening 30 stores this year versus prior goal of 75, and will be shuttering 19 stores. That’s the prudent move, but bearish as it relates to the growth potential in the core. The company notes that Covid will create real estate opportunities. I couldn’t care less about real estate opportunities – I care about market and new customer opportunities. Covid is hardly growing the size of the market. Quite the opposite, in fact. There’s a price to own this name, but it’s not 15x NTM cash flow. Short interest stands at a mere 4% of the float, which is the lowest in over a year. Perhaps that’s because the name is 35% below its pre-covid all-time high. But I think people are missing the fact that retailers go through a borderline-violent re-rating when they run out of square footage growth. This won’t end well. Looking at next year, the consensus is assuming that we see a massive ramp from $3.50 this year, to $10.70 in FY22 (Jan). I think it will be lucky to break through the $10 eps mark due to traffic and gross margin pressures. This name is buyable at a mid-teens multiple on a realistic earnings number – which is about $140-$150 – about 33% below current levels. The consensus price target of $270 is a pipe dream.
