Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.
What we’re looking for
The graphs you’re about to see tell Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA)’s story, and we’ll be grading the quality of that story in several ways:
Growth: Are profits, margins, and free cash flow all increasing?
Valuation: Is share price growing in line with earnings per share?
Opportunities: Is return on equity increasing while debt to equity declines?
Dividends: Are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let’s take a look at Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA)’s key statistics:
ULTA Total Return Price data by YCharts.
| Passing Criteria | 3-Year* Change | Grade |
|---|---|---|
| Revenue growth >30% | 82.8% | Pass |
| Improving profit margin | 104.2% | Pass |
| Free cash flow growth >Net income growth | (37.3%) vs. 273.2% | Fail |
| Improving EPS | 242.8% | Pass |
| Stock growth (+ 15%) <EPS growth | 311.3% vs. 242.8% | Fail |
Source: YCharts. * Period begins at end of Q2 (April) 2010.
ULTA Return on Equity data by YCharts.
| Passing Criteria | 3-Year* Change | Grade |
|---|---|---|
| Improving return on equity | 43.9% | Pass |
| Declining debt to equity | No debt | Pass |
Source: YCharts. * Period begins at end of Q2 (April) 2010.
How we got here and where we’re going
Ulta could use a little touch-up on its free cash flow, which has been stuck in neutral for years as earnings have soared. The company’s flying share price has also cost it a passing grade by getting too far ahead of the growth in its earnings. However, Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) still mustered five out of seven passing grades, which is a strong showing — we can’t grade the company on dividends, as it only made one special payout a year ago. What can this salon supplier do to get itself a perfect score next time? Let’s dig a little deeper.
Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA)’s latest quarterly revenue was up 23% over the year-ago quarter, and same-store sales popped by a respectable 6.7%. The company is currently focusing on its online sales platform, which has driven significant revenue growth over the past few quarters. Fool analyst Sara Hov notes that Ulta’s management has an ambitious plan to open 750 new stores over the next few years, bringing the total number of stores close to 1,200. Ulta’s aggressive store expansion will certainly result in additional revenue, but it may crimp margins and is likely to suppress free cash flow as well while the company spends on its buildout.
Ulta’s big quarter hasn’t been enough to sway everyone on Wall Street, though. Its stock was the target of another buy from Lone Pine Capital, but Goldman Sachs Group, Inc. (NYSE:GS) downgraded Ulta to hold around the same time. Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA)’s not exactly cheap right now with a 36 P/E and a far uglier 102 price-to-free cash flow ratio, and that can make some investors jittery. Keep in mind, however, that the company wants to more than double its store count, and that — at least in theory — should drive much higher earnings and free cash flow once more funds are freed up from expansion for other purposes.
Putting the pieces together
Today, Ulta has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy — or to stay away from a stock that’s going nowhere.
The article Is Ulta Salon Destined for Greatness? originally appeared on Fool.com and is written by Alex Planes.
Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. It recommends and owns shares of Ulta Salon, Cosmetics & Fragrance.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
