Ulta: Buy In Before It's Too Late

| About: Ulta Beauty, (ULTA)

Shares for Ulta have plummeted nearly 15% after last week's announcement that Ulta Salon, Cosmetics & Fragrances Inc. (NASDAQ:ULTA) CEO, Chuck Rubin, has stepped down to become the CEO of Michael's Company. With a 52-week high of $103.52 and low of $78.87, I believe that ULTA is about to experience a bull and this is why.

ULTA is the largest beauty retailer in the United States and specializes in affordable beauty and salon products and services to customers. The company retails cosmetics, fragrance, hair care, and a full salon service in all of its 550 stores in 45 different states. Furthermore, ULTA also sells products through its website.

Financial Indicators:


Specialty Retail Peers

Retail Industry

Operating Margin (TTM)




P/E excluding extraordinary items




Current ratio




LT debt/equity (MRQ)




Total Debt/Equity (MRQ)








Sales Growth (5Yr)




EPS Growth (TTM over TTM)




(Data taken from Scottrade)

The above indicators demonstrate that ULTA has outperformed its competitors and the industry over the past year during a period when expectations for retail have been low due to Hurricane Sandy, a weak holiday season, and the increased competition from online retailers such as Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY). With operating margins double that of its competitors and a ROE 123% greater than the industry average, ULTA has demonstrated that it is able to bring in revenue as well as implement cost reduction strategies to ensure increasing profitability. This demonstrates strong leadership and a sophisticated business platform which should allow investors to be very optimistic for future quarters.

Furthermore, ULTA has no long-term debt on its balance sheet, and therefore is able to utilize all assets to finance existing operations and invest in additional capital to garner in greater future revenue. Responsible management of debt again indicates the performance and capability of the company's executives.

A high P/E signifies that there is very positive sentiment among investors relating to the future of ULTA. At 36.5, the ratio indicates a bullish performance in the future, but it is not high enough to be over-speculation as the PEG ratio is maintained at a low 1.5. Factoring growth of the company, the P/E is not over-speculated and P/E will actually increase as investors buy in during a low after the drop last week.

Dilemma with the CEO Position:

I will not make any conjecture as to why he left ULTA for Michael's Stores, but I will quote from Rubin himself:

"My choice to pursue an opportunity at another company was not easy, but I believe it is the right decision for me and my family," said Mr. Rubin. "I have very much enjoyed my tenure as President and CEO at Ulta Beauty, working alongside some of the industry's finest talent. I am proud of what we have accomplished together and am confident that the Company will continue to drive value creation for shareholders and other important stakeholders through the execution of its growth strategy."

In the interim, Dennis K. Eck will serve as the CEO while a search committee, headed by Mr. Eck, will be searching for a replacement CEO and I assume that the minute that a replacement CEO is announced, shares of ULTA will make another move.

It is disconcerting that the ULTA CEO since 2010, Chuck Rubin has left ULTA to serve as CEO for Michael's Stores, the arts and crafts retail, but I am in the opinion that this will not negatively affect the performance of ULTA in the future. Mr. Rubin has only served as CEO at ULTA for 2 years, which is not an insignificant duration but it sure is not a long time by any standards. The average CEO tenure is 5.5 years according to a report in 2012. In two years, I would be skeptical if Rubin had made major infrastructure changes that allowed ULTA to churn out the above numbers, but rather I believe the infrastructure and business model has been in place for years and Rubin simply had to keep it going. Furthermore, the interim CEO, Mr., Eck has served as chairman of the ULTA Board of Directors since 2003 and served as CEO of a major Australian retailer from 1994 to 2001. From his CV, Mr. Eck is both qualified in leading a major retailer and is familiar with the ULTA strategies as he has observed, discussed, and directly participated in the development of ULTA for the past 9 years. Therefore, albeit the CEO has left his post, investors should realize that this move will not be detrimental as Eck will ensure that the new CEO will perfectly fill the void in coherence with the ULTA business strategy.

Forward Looking:

After a successful Holiday Season of $475.6 million in sales, a 23.2% increase from last year's Holiday Season of $386 million, the company has reaffirmed its Q4 FY 2012 earnings estimates of net sales to be in the range of $742 million to $752 million and an EPS guidance in the range of $.96 to $.98. The company will report Q4 earnings on March 14, 2013. Six of the last seven earnings reports have been positive surprises for ULTA, so another positive surprise this quarter would not surprise me, especially after a strong holiday season.

In Conclusion:

I would agree the voluntary exit of a CEO from his/her tenure at a company is bad news, but in this case I believe the decision was more personal than relating to the company itself. Furthermore, there is excellent leadership at ULTA, excluding Chuck Rubin, that will continue to propel ULTA ahead potentially to triple digit share prices. Lastly, with its current TTM and guidance numbers, ULTA is exceeding expectations, out pacing competitors, and deserves to be labeled as a buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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