Penn Wealth Publishing

2019.09.15 Penn Wealth Report Vol 7 Issue 04

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12 penn wealth Report volume 7 iSSue 04 15 Sep 2019 Penn Wealth Report Copyright 2019. All Rights Reserved. investment intelligence Household & Personal Products Ulta Beauty's Ugly Day The cosmetics darling fell 30% in one day; is that a warning sign or a rare opportunity for investors? For the better part of a decade, beauty retailer Ulta (ULTA $224-$227-$369) could do little wrong. With a lofty P/E ratio of 50 just a few short years ago, investors were willing to price the company more like an upscale luxury brand than a household and per- sonal products company. All that seemed to change after a rather disastrous earnings report-based state- ment precipitated a one-day, 30% selloff in shares. When the dust settled on the last trading day of August, Ulta's P/E ratio had crashed back to earth, sitting at a more reasonable 20, and the company had shed exactly $100 per share. Just how bad were the numbers? Actually, while not exactly stellar, they certainly weren't bad enough—in and of themselves—to lop off nearly one-third of the company's market cap. In fact, reve- nues in Q2 rose 12% from last year, to $1.67 billion, with $161 million flowing down as net income—an 8.8% spike. Much of this was due to the highly-an- ticipated launch of Kylie Cosmetics, Ulta's exclusive line from Kylie Jenner. e trouble came in the form of a statement released by CEO Mary Dillon which accompanied the results. In it, she cited industry-wide headwinds as the reason for a gloomier outlook for the remain- der of the year. Instead of double-digit total sales growth, the company may see just 9%; instead of comparable sales growth between 6% and 7%, we can now expect 4% to 6%. While those revisions may not seem disastrous on their face, they are substantially lower than what Wall Street had been projecting. For a company which had been so adroit at growing market share at the expense of competi- tors, the CEO's words came down on investors like a bucket of cold water. Buy at a steep discount or stay away? Shortly after the CEO's statement was released, ana- lyst downgrades came flooding in, and they were not—for the most part—simple little tweaks. Piper Jaffray downgraded ULTA shares from Buy to Neutral and dropped the price target from $360 to $250 per share. Morgan Stanley downgraded shares from Overweight to Equal Weight and slashed the target price from $395 to $275 per share. Stifel went from $315 to $250 per share, while maintaining a Hold rating. Let's face it, these analysts' reputations were on the line, and they ended up with egg on their face by holding such lofty target prices on shares of the company. It makes sense that they might overreact to Dillon's downwardly-revised guidance. We hav- en't owned the company (recently), however, and can offer some detached observations. Illinois-based Ulta sells over 20,000 products in their 1,200 retail stores spread across all 50 states. More importantly, they have a strong, loyal, and relatively young customer base with deep pockets. Much more so—on all counts— than competitors such as Sally Beauty (SBH) and Beauty Brands. And don't downplay the importance among this social media-savvy group of the Kylie Cosmetics line, or the KKW (Kim Kardashian West) Beauty line coming to Ulta this fall. With a dedicated and growing follow- ing, a flawless balance sheet, and strong leadership in the C-suite, we put the fair value of ULTA at $350/share—a 54% premium over the current price. e contents of this report reflect the personal views, opinions, and research of Penn Wealth Publishing. While measures are taken to help assure the accuracy of data, no guar- antees can be made and the firm is not liable for any losses incurred by subscrib- ers. is is not a solicitation to buy. Always consult your investment professional before investing any money. ULTA @ $227

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