Beauty Retailer Stock Brings Early Christmas for Value Investors

Core Viewpoint - Ulta Beauty's stock is misclassified as part of the consumer discretionary sector, while it should be considered within the consumer staples sector due to the consistent demand for skincare and beauty products regardless of economic conditions [1]. Financial Performance - Ulta Beauty has a net income margin exceeding 11% and a return on invested capital (ROIC) rate of 29.6%, indicating strong financial efficiency [10]. - The company has a gross margin rate of over 42%, outperforming competitors like Target, which has a gross margin of 27.9% [20]. - Analysts forecast a 10.7% growth in earnings per share (EPS) for Ulta over the next 12 months, with J.P. Morgan raising the price target to $544, suggesting a potential rally of 47.2% from current levels [22]. Shareholder Returns - Ulta Beauty has allocated up to $289.4 billion for share buybacks, which is a tax-efficient way to return capital to shareholders [5]. - Management has guided for an additional $1 billion in share repurchases for the remainder of 2024, representing nearly 10% of the company's market capitalization [24]. Market Position - Ulta's stock has experienced a significant decline, trading at 64% of its 52-week high, which may present a buying opportunity for value investors [21]. - The company has a strong rewards membership program, contributing over 90% of its revenue, a benchmark not commonly seen in the retail sector [11]. Analyst Sentiment - Despite a "Moderate Buy" rating among analysts, Ulta was not included in a list of top stock recommendations by leading analysts [6][25]. - DekaBank Deutsche, Ulta's largest shareholder, increased its stake by 17.8% as of June 2024, bringing their total investment to $109.9 million [12].