No, this one’s not about you and your Uncle Bill. And it’s not about the little Gumshoes and their struggle with Algebra. It’s a headline from Frank Curzio, who earlier in the week sent out a hint-y email to at least a few folks that said, “How to capitalize on America’s most ‘stupid’ family.” It’s not even clear exactly what the pitch is, the teaser email was forwarded by a couple folks with a Curzio Research Advisory masthead, so presumably it’s a recommendation for that letter… so this isn’t a widely circulated promo pitch, I mostly just found it interesting and decided to follow up (FYI, that newsletter is his go-anywhere “entry level” letter, $79/yr).
And he was, of course, talking about the Kardashians… who are, regardless of how you feel about their signature vapidity, culture and style icons.
I hadn’t seen much about the Kardashian clan, other than the magazine covers in the checkout line at the grocery store, but we spent a couple days in Jackson Hole over the summer during our jaunt around a few National Parks… and the Kardashians happened to be in town at the same time. The scene was positively goofy, if not quite Beatlemania goofy, there were mobs of teenage girls following them around, holding their phones up to catch a glimpse of celebrity and squealing… and that was, I’m told, only a couple of the less-famous Kardashians (and their cameraman) who crossed paths with us. I can’t imagine how crazy it would have been if Kim and Kanye had been strutting about the town square.
So yes, I see the celebrity “power” even if I can’t quite believe it. I did not get interested even a little bit when Glu Mobile (GLUU) was riding high on its Kim Kardashian game five years ago, which struck me as an absurd one-hit-wonder story (though the business has diversified a bit in the ensuing years, and that game has endured with popularity far beyond what I imagined possible), but I assume there are other ways to make money from the manufactured reality business. So what is Curzio actually hinting at? How do we capitalize on this? Here’s a bit more from his email:
“… whether you love or hate to ‘keep up’ with the Kardashians, their undeniable popularity is helping one company position itself to dominate for years to come.
“It’s a business with stores in all 50 states and over 30 million loyal shoppers… but a recent underperforming quarter has some investors running to the exits.”
OK, interesting… it’s hard to find anything more beaten down than retail these days, so there must be some bargains to be had, right? Any other hints?
This is what he says:
“This knee-jerk selloff has created the perfect entry point to own an industry leader that’s beating the market in nearly every measure… and the prospects are so promising that even company insiders are buying up shares to the tune of $50 million.”
Ah, now that’s an endorsement — if there is actual insider buying I might be interested. So what’s the stock?
This is not so tough a puzzle, and I’m sure many of you have already guessed at the name — but yes, this is Ulta Beauty (ULTA), the highflying retail growth stock that has recently lost its mojo.
If you’re not familiar with the company, it’s a beauty product retailer and salon/service chain, with most of its locations in and around shopping malls. This is how they describe themselves:
“Ulta Beauty is the largest U.S. beauty retailer and the premier beauty destination for cosmetics, fragrance, skin care products, hair care products and salon services. In 1990, the Company reinvented the beauty retail experience by offering a new way to shop for beauty – bringing together all things beauty, all in one place. Today, Ulta Beauty has grown to become the top national retailer offering the complete beauty experience.”
They have about 1,200 stores now, and that rewards program is indeed impressive with 30 million members — the stock has presumably been fueled over the years by store growth, since opening a lot of new stores is the most dramatic way to get revenue growth, and that’s starting to slow down… but they do still have impressive growth overall, just much less dramatic than it was a few years ago.
The stock soared in the years after the financial crisis as they expanded nationwide, boasting wild revenue and earnings growth that got them a premium valuation, but has stalled a bit over the past three years — from looking at the chart you can just imagine the battle between greed and fear in each ULTA investor’s head…
So the stock is now back to where it was in mid-2016, though it was trading at a trailing PE of 45 at the time and the trailing PE today is about 20. The shares had an extremely sharp drop last quarter, falling $100 in one day after they reported earnings at the end of August, so they’ve lost about a third of their value since the high (the all-time high was close to $370, hit just in July, and the shares are now at about $245).
But our job is not to worry over what has gone before, it’s to think about what a company is worth now and whether we think they are likely to generate more cash or grow in value in the future.
The issue last quarter was that Ulta both failed to meet the forecasted revenue growth numbers analysts had expected, and, far more importantly, lowered guidance for the rest of the year — they dropped their comparable store sales growth expectation to 4-6% and cut their earnings per share forecast from $12.93 to $11.96. That 30% drop in the share price was obviously dramatic, but that’s what happens when a growth company disappoints — the business is not deteriorating, it’s just growing slightly slower than people thought, and that means sentiment has to shift and future expectations have to drop. The same thing happened early in 2017, though a little less abruptly, when they were coming off of their ludicrously high 17% same store sales growth.
So now, with an expectation of $11.96 in earnings per share for their FY 2020 (which is right now, ends , ULTA trades at 20X current-year earnings. How does that sound for a company that’s growing same-store sales by about 5% and earnings by close to 10% (the guidance implies 9% earnings growth for this year)? Well, it sounds… OK. It’s not bargain-basement cheap, but unless the business really falls into crisis it probably won’t get that cheap, not with a still-growing store count, steady margins and consistent profitability, loyal customers, and same-store sales growth.
The question, really, is whether there’s a worsening trend and the business is falling apart. I’ve never been to one of the stores, and Mrs. Gumshoe and the Little Gumshoes don’t shop there, so I don’t really have any firsthand experience to share… but from the exterior, it looks like it’s worth thinking about the stock here, and it’s certainly the largest US go-to source for US beauty consumers, at least younger consumers (second place would be Sephora, which is privately held).
The tenor of the commentary from the company and from analysts was all about “weakening trends in the wider cosmetics market” and “headwinds in the US cosmetics market,” and I can’t say that I really know what that means or what’s causing it… but to a large degree I’d say beauty and makeup are consumer staples, so it’s not like the market has much chance of disappearing rapidly. They have been talking about expanding internationally, starting with Canada, so that is another possible area of growth as they close in on their target (they had initially planned, years ago, to reach a US store count of 1,400-1,700, and they’re roughly 80% of the way there, with roughly 80 new stores expected to open this year as that growth pace slows a bit) … though expanding into new markets also brings cost and risk, of course.
And while there seems to be constant disruption in makeup and beauty brands from celebrities and new-wave health and wellness and beauty products that are so easily built into brands on Facebook and Instagram these days, the grandmamas of the “Influencer” set, the Kardashians, are indeed on board with Ulta, at least to some degree, and that’s almost certainly a big positive. Kylie Jenner, the cosmetics tycoon of the family, agreed recently to sell some of her products through Ulta, and Kim Kardashian West is bringing her newer KKW Beauty brand to Ulta (exclusively) as well. I don’t know how to measure the impact of that, but beauty and appearance is certainly their “brand” and they will have thousands of followers who buy their stuff religiously.
Their next earnings report should give us a better view if they provide any updates about key holiday shopping and traffic trends, both online and in stores, and they’ll announce that in the first week of December… but for now, it’s starting to look fairly appealing — I wouldn’t rush in and bet big on the stock before earnings, but this valuation looks pretty reasonable for a still-growing company that has a strong digital platform and strong loyalty program, with same-store-sales growth that is still well above inflation, and with buybacks bolstering the per-share numbers (they’ve bought back more than a million shares this year at an average of $340/share, and have consistently done buybacks for years — the share count is down about 10% since 2015).
And what of the insider buying? Yes, there was a splash of insider buying by ULTA board member Charles Heilbronn a few weeks ago, after the collapse in the share price (his holdings went from about 1.8 million shares to 2 million, at prices between $235 and $250, so that would indeed have been roughly a $50 million outlay) — and improving sentiment fueled by that vote of confidence pushed the stock up briefly to $265 or so, though it has since come back down below $250.
I assume this is partly Heilbronn’s money, but his personal shareholding is really different (and hasn’t changed much) — he’s also an Executive Vice President at Chanel (and manager of some of the fortune of Chanel’s owners), and those funds have been invested in Ulta since at least 2007 — and Chanel knows a little something about selling and branding abstract concepts like “beauty”, though I don’t know if they have any deeper connection to the company than that. The reason this buy jumps out to me is that they are effectively just re-buying some of the shares that they sold when the stock was near the all-time highs in the $335 neighborhood in March. We shouldn’t overstate their prescience regarding what a “fair” price is for the shares, Heilbronn also sold some big chunks in earlier years, but the fact that he saw a reason to take profits at $335 and a reason to buy back in below $250 with a meaningful chunk of his fund’s holdings gives some indication of how one of ULTA’s longest tenured shareholders (and a board member) feels about the valuation and the prospects for the company.
And for what it’s worth, Mary Dillon, ULTA’s CEO, also added to her holdings at $237 in late September — that was a smaller buy, the purchase was much smaller than the past grants she has received and she basically increased her position by 1%, but a CEO buying is always good… and she also exercised options and sold a big chunk of shares back in March at $335, so perhaps she has some price sensitivity or an opinion about “fair” valuations as well.
So again, you don’t want to overreact to insider purchases — particularly small ones like CEO Dillon’s which seem like they might be more of an overt attempt to signal confidence to investors than a real expression of personal price sentiment — but a little chunk of insider buying is a good thing. I’ll put ULTA on my watch list, I don’t see any indication that things are about to abruptly turn around when it comes to investor sentiment about retail, and I would like to spend a little time learning more about what this “headwind” might be in the cosmetics and beauty business and how the health (or lack thereof) of mall traffic impacts them, but I like the setup here in terms of the valuation, the growth potential, and the established strength of the brand.
Reality television and the adoration of “influencers” might be stupid, that’s certainly my reaction to this whole trend, but the Kardashian’s are pretty smart about building and extending their brand… and buying a dominant and growing national retailer at a fair price probably isn’t a stupid idea. That’s just what I think, though, and it’s your money at stake — have any experience with Ulta as a customer or investor? Think it’s appealing after this latest drop? Let us know with a comment below.
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P.P.S. Please do not submit your alternative “stupidest family” nominations here, we’d like to keep things friendly in the comment section 🙂