December 04, 2019 - 8:39pm EST by
2019 2020
Price: 239.43 EPS 11.957 13.136
Shares Out. (in M): 59 P/E 20.0 18.2
Market Cap (in $M): 14,090 P/FCF 11.4 11.4
Net Debt (in $M): 1,500 EBIT 888 951
TEV (in $M): 15,590 TEV/EBIT 17.6 16.4
Borrow Cost: General Collateral

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This is a recommendation to short shares of ULTA.  Note, ULTA reports earnings tomorrow (Thursday, December 5th) after market close.  We do think the quarter will be weak, but short term trading dynamics are hard to call, so reader beware.


ULTA has been previously written up multiple times on VIC (November 2012, June 2017, and most recently September 2019).  I'd draw your attention to those write-ups for the basics.  In short, ULTA operates approximately 1200 stores that sell prestige beauty products, and have a beauty parlor onsite.  The company dominates the prestige beauty segment.  It also operates a best in class loyaty program, which historically has been good at managing traffic and margins.

Current Situation

ULTA is facing the end of a multi-year era of massive category expansion.  We believe the growth of social media, particularly Youtube and Instagram, has been game-changing.  Consumers have bought into additional trend after trend while mimicking the looks of social media stars.  Direct-to-consumer brands with traction have been scooped up by the majors and parachuted into distribution channels like ULTA's where they've enjoyed significant growth.  

This era very abruptly came to an end as consumers stopped shopping last quarter.  We have met with the company twice since then and they've stuck to the same script: (1) there was a lack of newness this year that they did not expect and they're working on getting more newness now; as (2) brands focused on "pallete extensions" where they took the same look/product but added skin tones, in part to appeal to minority customers -- this is a problem because it doesn't drive incremental sales.  These two would be enough for a short-to-medium short anyway, as it would take 6-12 months to fix these problems.  But the issue is deeper.

We believe: (1) prestige beauty has hit a point of "closet saturation" that other concepts have seen in the past.  What's happened in other cases is that a fashion concept will grow very quickly while consumers purchase more and more, and eventually they realize their closet is too full and they need to stop purchasing.  In this case, it's their beauty cabinets; (2) Amazon and other online players are now credible competitors and are capturing incremental growth; and (3) we are on the verge of a huge next wave of makeup with a "make-up less" or "light" look, in response to the elaborate "Euphoria" looks we've been seeing, and dovetailing with a growing global focus on conservation and anti-consumerism (think Greta).


Practically speaking, this means sales growth will disappoint for a few quarters, while SG&A continues growing, margins compress, and earnings growth suffers.  Various checks have said that the efficacy of incremental promotions has been waning, which increases gross margin risk in the near-term. 

Although ULTA is still a good retailer, it doesn't deserve a 20x multiple during what could be a protracted period of industry weakness, and we expect the multiple and stock price to follow.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Sales for this quarter may be fine but margins should be weak.  They'll have to talk down Q4 given a soft start to the quarter (based on credit card data).  And the algo is questionable for 2020.

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