Ulta Beauty: Waiting to Buy More of These Ultra-Pretty Stocks

NEW YORK (TheStreet) -- Ulta Beauty (ULTA) is the largest beauty retailer in the United States. The company operates 797 stores in 48 states. I think the company could easily double its number of stores. I like Ulta because the company can continue to add stores while delivering same-store sales growth of 7% to 9%.

Unlike other beauty retailers, like Sephora, Ulta only operates off-mall, which costs less to run. Ulta's stores are typically 10,000 square feet. In contrast, Sally Beauty Supply (SBH), which caters to professional stylists, operates stores that are only 7,500 square feet. Ulta's stores sell 20,000 items from 500 brands, making the stores a destination. Customers can even have their hair done at some of the stores.

In Ulta's most recently reported quarter, the company increased sales 21.6% and reported same-store sales of 11.4%. That 11.4% was driven by a 7.2% growth in transaction and a 4.2% growth in average ticket. In other words, each store is selling more at slightly higher prices. What retailer can do that nowadays?

Gross profit increased 40 basis points to 34.9% and general and administrative expenses declined 60 basis points to 22.2%. Operating income increased 33% to $107.6 million.

Ecommerce sales grew 49.8% to $44 million and salon sales increased 20.5% to $51.3 million. The company has been working hard to drive salon sales. Ulta has a close relationship with Redken and employees 10% of the 3,000 Redken certified colorists in the United States. Ulta has spent the last few years training its stylists in both the latest hair and makeup looks with the belief that salon customers spend 2.5 times non-salon customers and shop twice as frequently.

Management has a five-year goal of opening 100 stores a year and delivering sales growth between 5% and 7%, which means earnings will grow in the low 20% range. That's a formula for success in retail and should push the stock much higher over the next three to five years.

With the goal of opening more than 1,200 stores and delivering solid same-store sales growth, I think shares of Ulta Beauty are ultra pretty.

This article is commentary by an independent contributor. At the time of publication, the author was long ULTA.

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