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M c I n t i r e I n v e s t m e n t I n s t i t u t e
McIntire Investment Institute At the University of Virginia
Long Pitch: Ulta Salon, Cosmetics & Fragrance,
Inc. (NASTAQ: ULTA )
Ze Zhang| October 27, 2011
1
M c I n t i r e I n v e s t m e n t I n s t i t u t e 2
Agenda
Questions
Risk
Misperception and Catalyst
Thesis points
Stock summary
Business overview
M c I n t i r e I n v e s t m e n t I n s t i t u t e 3
ULTA Business Profile
Founded in 1990 at Bolingbrook, Illinois.
Largest Beauty Retailer of Prestige, Mass and Salon Products and Services Under One Roof in the U.S.
Operating 394 Stores in 40 States as of April 30, 2011
Segments: retail stores, salon services and e-commerce.
M c I n t i r e I n v e s t m e n t I n s t i t u t e 4
52-Week Range : $30.01 -$74.000 Levered Cash Flow: $31.14M Total Debt: $0.00 Profit Margin: 5.74%
Share Price: $68.58 Market Cap: $4.21B P/E: 46.75 EPS: 1.47 ROE: 22.71%
ULTA Stock Summary
M c I n t i r e I n v e s t m e n t I n s t i t u t e 5
ULTA Thesis Points
Compelling Leadership in Industry
Momentum in Growth and Strategy
Stable and Steady Financial Position
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Thesis 1: Compelling leadership in industry
ULTA offers a broad selection of over 21,000 beauty products across all categories.
Marketing positions of “one-stop shopping for prestige, mass, and salon products” at all prices
Comparative Advantage
• Diversification
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Thesis 1: Compelling leadership in industry
Great and unique positions – high traffic off malls
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Thesis 1:Compelling leadership in industry
Customer Loyalty Program
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Thesis 1:Compelling leadership in industry
VAR: Appointment w/ store manager Cathy. “ … I ’ l l s ay 7 0 % o f t h e customers have a ULTA card and 50% of those who don’t are willing to open one. ” “…and we have new sales started every week. Some of the sales are member only and thus attract customers to go back.”
M c I n t i r e I n v e s t m e n t I n s t i t u t e 10
Thesis 2:Momentum in Growth and Strategy
Wide range of spread. Increasing Comparable store sales
Successful Market Penetration
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Thesis 2:Momentum in Growth and Strategy
Rigorous plan of expansion ahead.
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Thesis 2:Momentum in Growth and Strategy
Early phrase of store
expansion. 4
3
18
5
8 8
States with more than 20 States with 10 - 20 States without stores
Store Num. Comparison
2008 2011
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Thesis 2:Momentum in Growth and Strategy
Comp Store Sales:
Differential in revenue generated by a retail chain's existing outlets over a certain period of time.
Distinct the revenue from Existing stores and Newly open stores.
M c I n t i r e I n v e s t m e n t I n s t i t u t e 14
Thesis 3:Stable and steady financial position
Early stage of expansion
Numerous cash required to new store open and existing store renovation
How is the cash flow?
M c I n t i r e I n v e s t m e n t I n s t i t u t e 15
Thesis 3:Stable and steady financial position
Facts: i: Currently ULTA has no long term debt outstanding. ii: Cash flow from operating activities successfully cover cash needed in expansion. iii: Superb inventory control.
0
20000
40000
60000
80000
100000
120000
140000
160000
180000
200000
2009 2010 2011
Capital Expenditure Cash Flow from Operating Activities
M c I n t i r e I n v e s t m e n t I n s t i t u t e 16
Thesis 3:Stable and steady financial position
Superb Inventory Control:
Inventory Turnover = 4.44
Cash Conversion Cycle.
ULTA manages to grow revenue while decreasing inventory per store feet.
M c I n t i r e I n v e s t m e n t I n s t i t u t e 17
Market Misperceptions & Catalyst
Economic crisis and volatility in global economic conditions will affect beauty product industry and ULTA’s financial
condition, especially liquidity.
The stock is over-valued with a P/E of higher than 35.
Shift of distribution Channel
M c I n t i r e I n v e s t m e n t I n s t i t u t e 18
Influenced by Economic Crisis?
Responsive Supply and Demand
Great Ability to Self-Adjust
Resistant to Economic Crisis
How much is it? It depends…
M c I n t i r e I n v e s t m e n t I n s t i t u t e 19
High P/E à Overvalued?
Normal trend of P/E during accelerating growth
ULTA is on its way to industry monopoly with aggressive
expanding rigorous growth.
Also interesting: EV/EBTIDA, a more accurate measurement of value, is
18.40 . PEG: 1.65 Is ULTA like Home Depot?
M c I n t i r e I n v e s t m e n t I n s t i t u t e 20
Catalyst: Distribution Channel Shift
• Consumers Started to Demonstrate a Preference for the Specialty Store Experience vs. Department Stores
• Specialty Stores Displaying Fastest Channel Growth and
Smallest Market Share
Specialty Stores has the greatest CAGR
M c I n t i r e I n v e s t m e n t I n s t i t u t e 21
Risks
• Sales Decrease.
• Unable to gauge beauty trends and react to consumer
preference change.
• Few barriers to entry and threat of competitors