ULTA Salon, Cosmetics and Fragrance, Inc.: Largest Beauty Retailer

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cosInvestment thesis on:

Current market price (As on 27-06-2012): $ 93.26
Market Capitalization: $ 5533 mn
Enterprise value: $ 5267 mn
No of outstanding shares: 62.88 mn
Call: LONG

We call for a long position because of the aggressive growth plans made by the management and also the ability of the highly experienced management to carry it out positively. Also there has been a momentum in the stock price of ULTA over the last 14 months or so. We expect that inertia to continue further owing to the double digit same store sales growth numbers for the last 8 quarters. We expect the price to at $119 per share. Business description:

ULTA Salon, Cosmetics & Fragrance, Inc. is the largest beauty retailer that provides one-stop shopping forprestige, mass and salon products and salon services in the United States. ULTA focuses on providing affordable indulgence to our customers by combining the product breadth, value and convenience of a beauty superstore with the distinctive environment and experience of a specialty retailer. Key aspects of ULTA’s business include: One-Stop Shopping: They believe in offering the widest selection of categories across prestige and mass cosmetics, fragrance, haircare, skincare, bath and body products and salon styling tools. They also offer a full-service salon and a wide range of salon haircare products in all of our stores. This give the customer a comprehensive shopping and styling experience under one roof at a time. Value Proposition: ULTA believes in giving a value proposition to its customers they do this byrunning frequent promotions and coupons offers for their mass brands, gift-with-purchase offers and multi-product gift sets for their prestige brands, and a comprehensive customer loyalty program.

An Off-Mall Location: ULTA stores are predominately located in convenient, high-traffic locations such as power centers

As on 30-Apr-2012, ULTA has 467 stores spread across 44 states if US. In the First quarter of 2012 they have revised their target number of stores from 1000 to 1200. A typical ULTA store is approximately 10,000 sq. ft. which is way larger than the comparable peers. In this 10,000 sq.ft. store, 950 sq.ft. of area is dedicated to their salon services. The management guidance for 2012 says that they plan to open 100 stores. And wish to add 15 % stores every year.

Comparable store sales have been in green for the ten straight years. The same has been at the lower double digit levels for the last couple of years. For the long-term future, the company management does not expect the comparable store sales to be growing more than 3 % to 5 %. This estimate of 5% of comparable stores sales is achievable over a period of 5 years as we can observe the same rate for one of the comparable peer The Sally beauty holdings ( 2009 - 1.8%, 2010 – 4.6%, 2011 – 6.1%) Even for companies which are into retailing of apparels and accessories for women are also around the same levels of 6%. So the comps number looks healthy and achievable.

They also have an e-commerce promotion and sales avenue, which they intend to strength further more in the coming years. Ulta.com serves not only as an e-commercesite, but additionally as an extension of Ulta’s marketing and prospecting strategies (beyond catalogs, newspaperinserts and national advertising) by exposing potential new customers to the ULTA brand and product offerings andproviding a 24 hour forum for loyalists to engage with the brand. This dual role for Ulta.com exists throughonline marketing strategies including search marketing, affiliate marketing, social networking, banneradvertising, and other online marketing channels. Ulta.com’s email marketing programs are also effective incommunicating with and driving sales from online and retail store customers.

The annual revenue per footage is growing from $ 352 mn to the current level of $ 371mn and is expected to remain at...
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