Last Friday, shares of ULTA Salon, Cosmetics & Fragrance (ULTA) - Get Report rose more than 9.1% after the company reported strong quarterly earnings. Despite the recent pop, shares of ULTA will still offer profitable upside return.
First off, have you ever heard of ULTA Salon?
Even if you don't, likely someone you know does -- the company is one of the largest beauty products vendors in the U.S. The great investor Peter Lynch, who took Fidelity's Magellan Fund from $18 million to over $19 billion in just 13 years, is often quoted as saying, "Buy what you know." The basis of this idea is that you know if a company makes a good product or has good service, so buy the things you like, as others probably enjoy it also.
But, this idea doesn't stop with just what you know, but what those around you know and love. Peter Lynch himself told a story that he bought Hanesbrands (HBI) - Get Report because his wife loved their L'eggs pantyhose so much. His wife talked about the pantyhose so much, he decided he had to look into the company and found HBI, which provided Lynch's Magellan Fund with a stock that increased by 30-fold.
With that story fresh in your mind, go ask someone in your life who may have shopped at or heard of ULTA Salon. But, before you learn about how much they love the company, let me show you why you should love it and own it for the long run.
ULTA is a relatively young public company, IPO'ing in 2007. Since then, the stock is up more than 628% while the S&P 500 (SPY) - Get Report has only increased by 36%. But, it would appear the price growth still has a ways to go.
This most recent quarter, the company still increased sales by more than 23%, hitting $10.7 billion, which was above what Wall Street was expecting. Comparable sale rose 15.2% as traffic grew by 11% and average ticket increased by 4.2%. On the retail side comparable sales increased by 13.9% while the salon experienced sales growth of 7.7%. Furthermore, the company added another 13 stores during the first quarter 2016, compared to 24 new stores in 2015, giving ULTA a total of 886 stores. But, management still plans to open roughly 100 new locations during 2016.
On the profit side, ULTA posted earnings per share of $1.45, $0.16 better than analysts' estimates and up 39.4% compared to the same quarter last year. ULTA also experienced an increase in operating margins, 13.7% compared to 12.4% last year.
Moving forward, ULTA management believes it will grow second quarter revenue by 11% to 13%. It also believes same store growth will come in at 10% to 12%, an increase from the previous guidance of 8% to 10% growth.
While ULTA may not be a name you know well, it's currently growing at an amazing rate, and with it having a $14 billion market cap, it still has room to grow. Investor buying today shouldn't be concerned with the profits they may have missed in the past, but look at the future and how bright it is for ULTA.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.