TIVP003: ULTA BEAUTY (ULTA): A BEAUTIFUL COMPOUNDER

W/ SHAWN O’MALLEY

19 January 2025

In today’s episode, Shawn O’Malley (@Shawn_OMalley_) breaks down what you might call a beautiful compounder. That is, Ulta Beauty, one of America’s largest retailers for cosmetics, skincare, and hair care products, with an impressive track record of generating returns on capital while benefiting from industry trends where beauty enthusiasts increasingly see beauty products as being key to their wellness and self-care routines.

Shawn outlines what has worked well for Ulta, why its customers are so loyal, how it survived disruption from Amazon, his thoughts on the company’s valuation, and finally, his decision on whether to add the company to The Intrinsic Value Portfolio he’s building each week on the show, plus so much more!

Prefer to watch? Click here to watch this episode on YouTube.

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IN THIS EPISODE, YOU’LL LEARN:

  • How Mary Dillon made Ulta into an e-commerce giant.
  • What customers love about Ulta.
  • How Ulta compares to Sephora and other competitors.
  • Why Ulta has been able to generate such impressive returns on capital.
  • Whether the company can continue growing.
  • How Ulta stacked up 44 million members in its loyalty program.
  • What makes the in-person experience at Ulta so special.
  • What’s attractive about Ulta’s current valuation.
  • And much, much more!

TRANSCRIPT

Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

[00:00:00] Shawn O’Malley: Hey, hey. Welcome back to The Intrinsic Value Podcast. Three weeks into my hunt to build a portfolio of the best intrinsic value compounders for long term investors, I’ve yet to find my first bet. I started with Madison Square Garden Sports Corporation, the holding company that owns the Knicks and Rangers, which has compounded its value at impressive double digit rates.

[00:00:19] Shawn O’Malley: But I passed on it since that value is only an estimate of what the teams could sell for, not based on the actual profitability of the underlying business. Madison Square Garden is a trophy asset, and that’s compelling, but not something I felt confident enough in going forward to invest in. And last week, I reviewed Coupang, the so called Amazon of South Korea.

[00:00:39] Shawn O’Malley: There was a lot to love about the company, but I couldn’t wrap my head around its growth prospects and given the scale of its logistics and technology, I just felt I was too far behind in my circle of competency to understand that company with any real conviction. This week, I’ve got my eyes on another candidate for the intrinsic value portfolio.

[00:00:57] Shawn O’Malley: One you might say has been a beautiful compounder. I say beautiful literally there because I’ll be covering the investment thesis for Ulta Beauty, ticker ULTA, deconstructing its business model and trying to estimate its intrinsic value. Ulta is one of the largest brick and mortar cosmetics retailers in the US with some truly impressive economics.

[00:01:19] Shawn O’Malley: The company has average returns on equity of over 50 percent in the past five years and more than 26 percent returns on invested capital, had average revenue growth of over 14 percent per year in the last decade. In both 42 percent gross margins, all while trading at a reasonable price to earnings ratio, with a 5 percent plus free cashflow yield.

[00:01:39] Shawn O’Malley: I’ll break down what those numbers mean and more in today’s episode, including with my evaluation of Ulta decision on whether to add it to our portfolio or not. With that, let’s jump into the story of Ulta, one of America’s most powerful beauty brands.

[00:01:55] Intro: You’re listening to The Intrinsic Value Podcast by The Investor’s Podcast Network. Since 2014, with over 180 million downloads, we’ve learned directly from the world’s best investors. Now, we’re applying those lessons to analyze businesses and investment opportunities every week, helping you uncover intrinsic value. Now for your host, Shawn O’Malley.

[00:02:28] Shawn O’Malley: Today, I’m covering Ulta Beauty, a company whose track record of compounding returns is nothing short of beautiful. My hope is to break down everything you could possibly hope to know about the business, estimate its valuation, and decide whether to add it to our intrinsic value portfolio. Ulta is a cosmetics retailer offering hair care, skin care, body care, makeup, and fragrance products.

[00:02:50] Shawn O’Malley: If you’re not familiar with it, the ladies in your life probably are, at least if you’re a listener based in the US. Beauty is an enduring part of the human experience, something that is not likely to be automated away or replaced by AI. And brick and mortar beauty retailing isn’t going away anytime soon, either.

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