Initiatives such as expanding its Benefit Brow Bars to 400 stores by the end of the year, making Ulta the biggest Benefit Brow provider in the U.S., and adding more Clinique and Lancôme boutiques look good. Ulta will be launching “several new brands” in the ongoing quarter.
The expansion and robust performance of Clinique and Lancôme boutiques also suggests that Ulta Salon has been able to attract customers away from department stores such as Macy’s, Inc. (NYSE:M). Macy’s, Inc. (NYSE:M) leads cosmetics sales in the U.S. with annual sales of around $3 billion, and its 840-plus stores eclipse Ulta’s count. However, Macy’s, Inc. (NYSE:M) has been struggling of late as shoppers cut down discretionary purchases. The company missed profit estimates last month and also lowered its expectation for the fiscal year.
Ulta’s interactive brand-building campaign is probably one of the reasons why it has been able to attract more customers from rivals. In addition, the company’s loyalty program is doing well. Ulta now has 12 million members covered by its loyalty program, up 19% from the prior-year period. According to management, sales to these members have improved along with member retention rates.
Ulta Salon saw an impressive 72% increase in its e-commerce revenue in the previous quarter. The company is looking to build on this success by adding more products and to keep interest levels intact, it is also redesigning its website. Considering these moves, Ulta’s growth story looks set to continue as it seems to be in a good position to capture more market share in the beauty industry.
Diversity counts
Ulta Salon’s business model of selling beauty products, cosmetics, fragrances and providing salon services has proved to be a solid one and gives it a diversified look. This makes Ulta a better pick when compared to a cosmetics company such as Elizabeth Arden, Inc. (NASDAQ:RDEN).
Elizabeth Arden, Inc. (NASDAQ:RDEN) is known for celebrity fragrances and Prevage anti-aging creams, but the company’s results of late haven’t been encouraging. Its dependence on department stores has hurt it as weak orders from its major retail customer in the previous quarter pushed it into the red. Elizabeth Arden, Inc. (NASDAQ:RDEN) had plunged almost 20% after its earnings guidance of $2.15 to $2.30 per share for fiscal 2014 came in way behind the $2.85 per share consensus.
The bottom line
So it’s clear that Ulta’s diversity is indeed an advantage, and the company has been making good moves to grow its business further. While it’s true that shares are now trading at a rich trailing P/E multiple as stated above, robust earnings growth is expected going forward and that’s why the forward P/E comes down substantially to 28x. Hence, investors should hold on to Ulta shares as the company can still deliver going forward.
The article Hold on to This Winner, It’s Still a Good Investment originally appeared on Fool.com is written by Harsh Chauhan.
Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Ulta Salon, Cosmetics & Fragrance. The Motley Fool owns shares of Ulta Salon, Cosmetics & Fragrance.
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