We’ve just learned that Casa Steelman has replaced Dave Kimbell as president and CEO of Alta Beauty. So, should we be concerned or optimistic? What does this leadership change mean for investors, and for the company as a whole?
Before this, Casa Steelman was the COO at Ulta Beauty and has been with the company since 2014. Prior to Alta Beauty, she held roles at Family Dollar, Home Depot, and Target, which currently collaborates closely with Ulta. Ulta Beauty, the largest beauty retailer in the U.S. with about 1,385 stores, has ambitious plans to open 200 more stores and grow its loyalty program to 50 million members by 2028. But such growth plans require significant investment, and analysts predict that the next two to three years could be challenging for the company.
Before looking to the future, let’s reflect on Ulta Beauty's past performance. If you had invested $1,000 in the company 10 years ago, you would have purchased eight shares, which are now worth approximately $331—a 230% gain over 10 years. That’s a solid return.
Looking at insider ownership, individuals own just 0.2% of the company, which is lower than we'd like to see (preferably over 2%). This indicates that management doesn't have as much "skin in the game" as we'd prefer, and there were multiple sales of shares in the past year. As for whether any super investors hold shares, the answer is yes—four notable investors do, but they’re not adding to their positions, as evidenced by Berkshire Hathaway selling 96.5% of its investment just three months after acquiring it.
Recap Earning Overview
Ulta Beauty reported its third-quarter fiscal 2024 results, with net sales reaching $2.53 billion, a 1.7% increase compared to last year’s $2.49 billion. Comparable sales grew by 0.6%, driven by a 0.5% rise in transactions and a 0.1% increase in average ticket value. Net income for the quarter was $242.2 million, or $5.14 per diluted share, up from $5.07 in the previous year.
For the first nine months of the fiscal year, net sales totaled $7.8 billion, a 2.0% increase from $7.7 billion. Gross profit as a percentage of net sales slightly decreased to 39.7% in Q3 and 39.1% for the first nine months. SG&A expenses rose to $682.3 million in Q3 and $2.0 billion for the first nine months, reflecting strategic investments. The company repurchased 731,458 shares for $267.0 million during Q3.
In terms of expansion, Ulta opened 28 new stores and remodeled 27 in Q3, with plans to open 60-65 new stores by the end of fiscal 2024. The updated fiscal 2024 guidance projects net sales between $11.1 billion and $11.2 billion, with diluted EPS expected to range from $23.20 to $23.75.
Fundamentals Analysis
Return on Invested Capital: A strong check at 28.33%. The 10-year median return is higher than 10%, indicating solid capital management. Net Profit Margin: Another check, averaging 9.5% over the past five years, significantly outpacing the sector’s median of 4.4%. Alta is effectively leveraging its scale to drive profitability.
Share Buybacks: A major check here, with 26.9% of shares repurchased over the past decade, meaning long-term investors own a larger portion of the company without additional investments.
Debt: Another check. Alta Beauty is in a strong position to pay off its debt within months using free cash flow, and it has no long-term debt, only short-term obligations.
Growth
Financial health is just part of the story, though—we also need to assess the company’s growth.
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Revenue Growth: A solid check at 15.4% CAGR over the last decade, well above our 10% threshold.
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Free Cash Flow Growth: A strong check here too, with a 26.2% growth rate over the past 10 years.
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Earnings Per Share Growth: Another check, at 23.5% over the last 10 years.
Ulta Beauty’s growth over the last decade has been impressive, particularly given that it’s been largely organic. The company has avoided debt and new share issuance to fund expansion, which I consider one of the key reasons for the company's long-term success.
While Ulta Beauty does not currently pay dividends, this strategy supports its focus on organic growth and share repurchases, which makes sense given its plans for expansion into new markets (including its recent move into Mexico). Not paying dividends helps Ulta fund these initiatives without being at the mercy of interest rate changes.
The price-to-earnings ratio is 16.5, which is attractive, especially compared to the S&P 500’s average of 27.9. To determine the intrinsic value of the company, we’ll need to run a discounted cash flow analysis.
Valuation Analysis
Looking ahead, here’s how we’re estimating Alta Beauty’s future growth in three different scenarios:
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Low Scenario: We project 4% growth over the first five years, followed by 6% growth thereafter.
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Medium Scenario: We expect growth to be 8% initially, then taper to 7% later.
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High Scenario: This assumes 13% growth initially, followed by 12% growth.
The low scenario aligns with some analysts’ predictions, suggesting a potential decline over the next two years, followed by slower-than-average growth, with the industry average growth around 7.2%. These predictions are largely based on the expectation that 2025 will be a transitional year for Alta Beauty, as the company invests heavily in initiatives to solidify its market position. The medium scenario reflects a more typical growth trajectory in line with industry trends. The high scenario assumes a slight slowdown from the past decade’s growth but still anticipates strong performance.
Based on these estimates, the intrinsic value of Alta Beauty would be:
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Low Scenario: $330
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Medium Scenario: $442
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High Scenario: $579
However, we always apply a margin of safety, and I use a 30% buffer. With this margin, the intrinsic values become:
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Low Scenario: $230
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Medium Scenario: $281
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High Scenario: $405
Currently, the stock is priced around $418, which means only the high scenario (without the margin of safety) suggests it's undervalued. Depending on which scenario you find more likely, the stock might be considered either expensive or close to fair value.
That said, it’s crucial to consider the context. Alta Beauty has had strong growth over the past decade, minimal debt, and has been aggressively buying back shares. However, there are variables like the new CEO, changing beauty trends, and consumer preferences that could significantly impact the business. This is why I’ve presented three very different scenarios—they all have the potential to play out.
Ultimately, Alta Beauty is a solid business, and while the new CEO may bring changes, she has been a key part of the company’s development over the years. As Alta becomes a more mature business, its focus will likely shift toward international expansion and strategic partnerships, like its collaboration with Target.
Let’s also take a quick look at the company’s rankings:
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Return on Invested Capital: 14th
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Share Buybacks: 11th
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Years to Pay Off Debt: 1st
Alta Beauty ranks highly among strong companies in these categories. Looking at the historical data, revenue and earnings per share show steady growth, though free cash flow has experienced some fluctuations, but overall the trend is positive.
Conclusion
In conclusion, it will be fascinating to see whether Alta Beauty can maintain its stable, organic growth, or if the new CEO will implement changes that could affect the company long-term. What’s your take on the future of Alta Beauty? Let me know what you think, and thanks for watching! See you in the next one.
While there are some concerns about insider ownership and the broader market environment in the short term, Alta Beauty’s strong financials, impressive growth, and clear focus on expanding its market share point toward a solid long-term outlook.
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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