Beginning with Thanksgiving and running through Christmas, this holiday season will mark the first time since the start of the pandemic that people will travel and gather in person with virtually no mandatory restrictions.
While people can still choose to mask up or socially distance from others, most people seem to have moved on. Along with a workforce that is increasingly returning to the office, there is a surge in demand for cosmetics, beauty products and salon services.
That’s why the beauty industry is one of the best performing market segments, and why Ulta Beauty (ULTA) 1.05%)which is currently trading near all-time highs, should be on your investing radar.
Image source: Getty Images.
The power of personal interaction.
The pandemic wrecked the retail market for those businesses unfortunate enough not to earn the distinction of being an “essential business.” Lockdowns, remote work opportunities and the inability to have face-to-face contact meant there was little need for makeup and grooming.
A reopened economy has changed that dynamic. Even with a potential recession looming in the new year, the industry is showing why it sees itself as resilient to such shocks. The Lipstick Effect should lead to Ulta, Coti, estee lauder (THE -0.68%)and even Olaplex holdings ahead for some time to come.
Coined by Leonard Lauder of Estée Lauder, the lipstick effect was first defined during the market crash caused by the dot-com bubble and the 9/11 market crash. He suggests that companies like beauty care brands shine in tough times because consumers who can’t afford real luxury products turn instead to smaller indulgences like lipstick.
ULTA data by YCharts
In fact, over the two-year period of 2009-2010, Ulta’s stock value quadrupled (Estée Lauder’s stock increased 171%) as sales rose 34% and profits nearly tripled. And year-to-date, Ulta’s revenue is up 76% over the same period in 2020, while earnings per share have skyrocketed from $0.08 per share two years ago to $17.35 per share this year.
A stock that gets cheaper as it goes up
While not a luxury brand, Ulta still has significant pricing power, which has boosted its bottom line without impacting customer demand. Despite raising prices this year to help offset the impact of inflation, same-store sales rose nearly 15% in the third quarter, although they enjoyed an increase of nearly 26% last year.
That kind of consumer response allows Ulta to keep opening new stores without fear of cannibalizing existing store sales or margins. The beauty care retailer has opened 35 new locations so far in 2022, but its gross margin increased by 160 basis points to 41.2% of sales compared to 39.6% in the year last.
Despite this growth, Ulta Beauty’s valuation has remained strong and has actually gotten cheaper over time. Though shares have quadrupled over the past decade, the retailer’s price-earnings ratio has halved, underscoring the power Ulta’s earnings growth has in this business.
ULTA data by YCharts
The last stock market downturn
Ulta is currently trading at 19 times next year’s earnings estimates. Although Wall Street believes it will grow profits at a slower rate in the next five years than in the previous five, this shows that the beauty retailer is actually reasonably priced.
The stock is also trading for 25 times the free cash flow (FCF) it produces, which isn’t a discount at all, but it is producing nearly $1 billion of FCF on an ongoing basis, a figure that has been growing steadily with time.
Ulta Beauty has proven that it can work through thick and thin, and that should brighten any investor’s portfolio.
Rich Duprey does not have a position in any of the listed stocks. The Motley Fool has ratings and recommends Ulta Beauty. The Motley Fool has a disclosure policy.
Source: news.google.com