Ulta Beauty: Don't underestimate the lipstick effect.

Ulta Beauty is the largest specialty beauty retailer in the United States and a leading destination for cosmetics, skincare, fragrance, haircare, wellness products, and salon services. Through its unique mass to prestige beauty model, the company combines affordable everyday products with luxury beauty brands under one roof, supported by a large store network, a strong omnichannel ecosystem, and one of the most successful loyalty programs in retail. With more than 1.500 stores, a rapidly growing digital presence, and continued expansion through initiatives such as Space NK and international partnerships, Ulta Beauty aims to strengthen its position as the leading beauty destination while driving long term growth. The lipstick effect suggests that beauty often performs well even during economic downturns, as shown in a study from Texas Christian University, making the category particularly interesting from an investment perspective. The question remains: Does this beauty leader deserve a spot in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Ulta Beauty at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Ulta Beauty, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Ulta Beauty was founded in Illinois in 1990 and has grown into the largest specialty beauty retailer in the United States. The company was created around a simple but powerful idea: beauty shoppers should be able to buy prestige cosmetics, mass market products, professional haircare, fragrances, skincare, wellness products, and salon services in one convenient place. Before Ulta, prestige beauty was mostly sold through department stores, while mass beauty was sold through drugstores and large retailers. Ulta combined these categories under one roof, creating a more welcoming and accessible beauty destination. Today, the company operates more than 1.500 stores in the United States, alongside Space NK stores in the United Kingdom and Ireland, stores in Mexico through a joint venture, and franchise locations in the Middle East. Its stores are typically located in convenient, high traffic retail areas and combine product discovery with services, including salons that offer hair, brow, and skin treatments. Ulta’s product assortment is broad, with around 30.000 products from approximately 600 established and emerging brands across cosmetics, skincare, haircare, fragrance, wellness, and beauty tools. This makes Ulta a one stop shop for beauty enthusiasts, which the company defines as consumers who see beauty as a form of self expression, experimentation, and personal investment. A key strength of Ulta’s business model is that it serves customers across many price points. Shoppers can buy affordable everyday products, premium beauty brands, exclusive products, private label products, and salon services in the same ecosystem. This gives Ulta flexibility in different economic environments, as customers can trade up to prestige products when times are good or trade down to more affordable alternatives without leaving the Ulta platform. The company also benefits from a powerful loyalty program, Ulta Beauty Rewards, which had more than 46 million members at the end of fiscal 2026 and represented approximately 95% of Ulta U.S. sales. This loyalty program gives Ulta valuable customer data, helps drive repeat purchases, and allows the company to personalize offers, recommendations, and marketing. Ulta has also built a strong omnichannel model, where stores, e-commerce, mobile apps, buy online pick up in store, curbside pickup, same day delivery, and ship from store all work together. This is important because most beauty shoppers still value physical stores, where they can test products, discover new brands, and receive advice, while digital channels add convenience and personalization. Ulta is now expanding beyond its core U.S. business through Space NK, Mexico, the Middle East, wellness, its online marketplace, and its retail media business. Its competitive moat is primarily built on its unique mass to prestige beauty model, large store network, strong loyalty program, valuable customer data, deep brand relationships, and the in-store experience that cannot easily be replicated online. The mass to prestige model is one of Ulta’s most important advantages because it allows the company to capture a larger share of the beauty wallet than retailers focused only on luxury, drugstore, or online beauty. Its loyalty program strengthens this advantage by creating a direct relationship with millions of customers and giving Ulta insights that are valuable both for its own merchandising and for brand partners. The store base also gives Ulta an advantage over pure e-commerce competitors because beauty remains a category where many consumers want to see, test, and compare products before buying. The salon services add another layer to this moat by driving recurring store visits, building personal relationships with customers, and encouraging additional purchases of haircare, skincare, and cosmetics. Ulta’s scale also makes it an attractive partner for beauty brands because it can help launch, build, and expand brands across stores and digital channels. This creates a reinforcing cycle where customers visit Ulta because of its broad assortment, brands want to be present because of Ulta’s customer reach, and Ulta becomes more valuable as its assortment and loyalty data improve.

Management

Kecia Steelman serves as the CEO of Ulta Beauty, a role she assumed in January 2025 after more than a decade of leadership within the company. Since joining Ulta Beauty in 2014, Kecia Steelman has held several key leadership roles, including Chief Store Operations Officer, and most recently, President and COO. During this time, she played an important role in scaling Ulta Beauty’s operations, strengthening its guest-centric culture, improving execution across stores, and advancing the company’s omnichannel capabilities. Her appointment as CEO reflects Ulta Beauty’s preference for leaders with deep operational understanding and a strong connection to both associates and customers. Before joining Ulta Beauty, Kecia Steelman built extensive retail experience through leadership positions at Family Dollar, Home Depot, and Target Corporation, where she began her career in an hourly in-store role and worked her way up to senior leadership over a span of twelve years. This progression has shaped her leadership style, which emphasizes operational discipline, execution, and a strong appreciation for frontline employees and store culture. Her background gives her a practical understanding of retail operations across multiple formats and customer demographics. Since becoming CEO, Kecia Steelman has moved quickly to strengthen organizational execution and clarify Ulta Beauty’s long-term strategic direction. One of her earliest priorities was ensuring that the company’s strategy was clearly understood throughout the organization, from store associates to senior leadership, reflecting her belief that strong execution requires alignment at every level of the business. She has also reshaped parts of Ulta Beauty’s leadership team to better position the company for its next phase of growth, emphasizing speed, accountability, and stronger coordination across functions. Kecia Steelman has highlighted that what helped Ulta Beauty succeed over its first three decades would not necessarily be sufficient for the future, reinforcing her willingness to evolve the organization while protecting its core strengths. Under Kecia Steelman’s leadership, Ulta Beauty has focused on regaining market share, accelerating innovation, and improving operational efficiency. Since taking over, the company has launched initiatives including the acquisition of Space NK in the United Kingdom, the rollout of Ulta Beauty on TikTok Shop, the expansion of its online marketplace, and new brand partnerships such as Rare Beauty. Importantly, Ulta Beauty’s improving performance has come during a period in which broader beauty industry growth remained relatively stable, suggesting that stronger execution and market share gains have played a meaningful role in the company’s momentum. Kecia Steelman has repeatedly emphasized that time and execution matter in retail, and her leadership approach appears focused on simplifying decision-making and moving faster in areas such as merchandising, brand partnerships, and go-to-market strategies. Kecia Steelman has also demonstrated a pragmatic and shareholder-oriented mindset. While prioritizing top-line growth and market share recovery, she has highlighted the importance of improving profitability, moderating capital expenditures after several years of elevated investment, and beginning to harvest returns from prior investments in infrastructure, digital capabilities, and the guest experience. Her stated focus is to balance growth with stronger profitability, while continuing to reinforce Ulta Beauty’s competitive positioning. Beyond strategy and operations, Kecia Steelman places significant emphasis on culture and employee opportunity. Having worked her way up from an entry-level store position, she frequently highlights internal career progression and believes strongly in creating opportunities for associates across the organization. She has stated, “If I did it, anyone else can do it too,” reflecting a leadership philosophy centered around accessibility, development, and upward mobility. This cultural emphasis may prove especially valuable in retail, where employee engagement and in-store execution play an important role in customer experience and long-term performance. Kecia Steelman currently serves on the boards of The Bay Club Company and the Adler Planetarium. Given her deep operational experience, long tenure inside Ulta Beauty, and focus on execution, organizational alignment, and profitable growth, Kecia Steelman appears well suited to lead Ulta Beauty through its next phase of growth as the company expands beyond its mature U.S. market and seeks to strengthen its leadership position in beauty retail.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Ulta Beauty has historically generated exceptionally high ROIC, with returns above 20% in nearly every year over the past decade and often exceeding 30%. The only notable exception was fiscal year 2021, which was affected by the pandemic and temporary store closures. Even with some moderation in recent years, Ulta Beauty continues to generate returns on capital that are significantly above what most retailers achieve. This suggests that the company has built a business model capable of earning strong profits without requiring excessive amounts of capital. Several structural characteristics explain why Ulta Beauty has consistently generated such high ROIC. First, Ulta benefits from a highly attractive retail model centered around beauty, a category with structurally favorable economics. Beauty products generally carry high gross margins, low spoilage risk, limited size variation compared to apparel, and relatively low return rates. Unlike fashion retailers that must constantly discount unsold seasonal inventory, many beauty products have longer product cycles and stronger repeat purchase behavior. This allows Ulta to generate strong profitability while keeping inventory risk relatively manageable. Second, Ulta Beauty’s differentiated mass-to-prestige model contributes meaningfully to returns. By offering both affordable and premium beauty products under one roof, Ulta captures a larger share of customer spending across multiple price points and categories, including cosmetics, skincare, haircare, fragrance, wellness, and salon services. This broad assortment increases basket sizes and customer frequency without requiring proportionally larger investments in stores or infrastructure. The ability for consumers to trade up or down depending on economic conditions also supports more stable demand and improves store productivity over time. Third, the loyalty ecosystem is an important driver of high ROIC. Ulta Beauty Rewards now has more than 46 million active members and represents approximately 95% of U.S. sales. This creates a powerful feedback loop. The loyalty program drives repeat purchases, increases shopping frequency, and gives Ulta extensive customer data that improves inventory planning, merchandising, and marketing efficiency. Because Ulta can personalize promotions and recommendations instead of relying on broad discounting, the company can generate higher sales productivity and stronger margins without needing to invest heavily in customer acquisition. This data advantage becomes increasingly valuable as the member base grows. Fourth, Ulta benefits from an efficient store model and strong store economics. While Ulta operates more than 1,500 physical stores, the stores themselves are not particularly capital intensive relative to the level of earnings they generate. A typical store requires approximately $2,4 million in upfront investment, which includes inventory and pre-opening costs, yet mature stores tend to generate strong profitability and attractive payback periods. Importantly, the stores also function as omnichannel fulfillment hubs through services such as buy online pick up in store, ship from store, and same day delivery, allowing Ulta to leverage existing assets more efficiently and improve returns on invested capital. Fifth, Ulta operates with a relatively strong balance sheet and limited financial leverage. Unlike many retailers that rely heavily on debt, Ulta has historically maintained a conservative financial profile, giving management flexibility to invest in growth initiatives without significantly increasing financial risk. This has enabled the company to steadily invest in digital capabilities, supply chain infrastructure, wellness, and new growth initiatives while still generating strong returns. The decline in ROIC since the exceptionally strong levels seen in 2023 and 2024 does not necessarily indicate a structural deterioration in the business. Rather, it appears largely tied to a combination of elevated investment and temporary profitability pressures. Under Kecia Steelman’s leadership, Ulta launched its “Ulta Beauty Unleashed” strategy, which includes investments in international expansion, wellness, digital capabilities, the online marketplace, supply chain improvements, and premium positioning through the acquisition of Space NK. At the same time, Ulta experienced some execution challenges related to merchandising transitions and operational changes, while competition intensified across beauty retail, leading to somewhat higher promotional activity and pressure on margins. These factors temporarily reduced profitability while increasing the invested capital base, naturally weighing on ROIC. Looking ahead, ROIC is likely to remain structurally high, although it may settle below the exceptionally elevated levels above 30% seen in some earlier years. The key drivers of strong returns remain intact. Ulta still benefits from favorable beauty category economics, a differentiated retail model, strong customer loyalty, attractive store economics, and valuable customer data that improves efficiency. Management has also signaled a more disciplined investment approach going forward, with capital expenditures and SG&A growth expected to normalize after several years of elevated investment. Kecia Steelman has emphasized not only investing in growth but also ensuring the company generates utility and returns from prior investments, suggesting a greater focus on profitable growth and operating leverage. International expansion, wellness, and newer digital initiatives may temporarily pressure returns as they scale, but if these investments mature successfully, they could ultimately support another phase of strong value creation. While ROIC may not consistently return to the mid-30% range, Ulta Beauty appears well positioned to continue generating returns on capital that remain significantly above most retailers and consumer companies.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Ulta Beauty has historically delivered strong and relatively consistent equity growth. Equity has increased in almost every fiscal year over the past decade, with the exception of fiscal year 2022, where equity declined meaningfully. Overall, this is a positive sign because it suggests that the company has consistently generated profits and retained enough earnings to grow shareholder value over time. Unlike many retailers, Ulta Beauty has managed to increase equity while simultaneously investing in store growth, digital capabilities, supply chain improvements, and shareholder returns. The primary reason Ulta Beauty has steadily grown equity is its strong profitability. The company generates high returns on invested capital and healthy free cash flow, which allows retained earnings to build over time. Because Ulta operates in an attractive category with strong margins and repeat purchase behavior, it has consistently produced earnings well above the capital required to operate the business. When a company earns more than it distributes to shareholders, equity naturally increases. This dynamic has been an important contributor to Ulta Beauty’s long-term value creation. Another reason equity has grown is Ulta Beauty’s conservative balance sheet. The company has historically maintained limited debt and largely funded expansion through internally generated cash flows rather than aggressive borrowing. This means that investments in stores, digital infrastructure, supply chain capabilities, loyalty programs, and newer growth initiatives have primarily been financed through retained earnings. By avoiding excessive leverage, Ulta Beauty has been able to steadily strengthen the portion of the business that belongs to shareholders over time. The decline in equity during fiscal year 2022 does not appear to reflect any structural weakness in the business. Rather, it was largely influenced by elevated investments, temporary operational disruption following the pandemic period, and significant shareholder returns through share repurchases. Ulta Beauty has historically returned meaningful amounts of capital to shareholders through buybacks, and when a company repurchases shares, the cash spent reduces equity on the balance sheet. This means equity can temporarily decline even when the underlying business remains strong. Importantly, fiscal year 2022 was followed by a strong recovery, with equity rebounding sharply in fiscal years 2023 and 2024. The record level of equity reached in fiscal year 2025 reflects Ulta Beauty’s ability to continue generating profits despite increased investments in initiatives such as wellness, ecommerce, supply chain improvements, international expansion, and the acquisition of Space NK. Rather than relying heavily on debt, management largely funded these initiatives through internally generated cash flow. This demonstrates the strength of Ulta Beauty’s business model, as the company has been able to invest for future growth while still increasing shareholder value. Looking ahead, equity is likely to continue growing over time, although the pace may fluctuate from year to year. The key drivers remain intact: Ulta Beauty continues to benefit from strong profitability, high ROIC, attractive store economics, and recurring customer spending supported by its loyalty ecosystem. However, growth in equity may occasionally be offset by share repurchases, acquisitions, or periods of elevated investment. Management has also signaled a more disciplined approach to spending under Kecia Steelman, emphasizing profitable growth and ensuring that prior investments generate returns before accelerating new ones. As a result, while equity growth may not be perfectly linear, Ulta Beauty appears well positioned to continue building shareholder value over the long term.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Ulta Beauty has historically generated very strong free cash flow and attractive free cash flow margins. With the exception of the pandemic period, free cash flow has generally trended upward over time and has consistently remained positive. This reflects the strength of Ulta Beauty’s business model, which combines high margins, recurring consumer demand, efficient store economics, and relatively moderate capital requirements compared to the level of profits generated. Even after recent declines, Ulta Beauty continues to generate free cash flow at levels that most retailers would find difficult to achieve. One of the primary reasons Ulta Beauty generates strong free cash flow is the attractive economics of the beauty category itself. Beauty products typically carry high gross margins, low spoilage risk, limited size variation, and relatively low return rates compared to categories such as apparel. Many products are consumable and purchased repeatedly, creating recurring revenue streams from loyal customers. This supports consistent cash generation and reduces the need for heavy markdowns or inventory write-downs. Because Ulta sells products across cosmetics, skincare, fragrance, haircare, and wellness, it also benefits from a diversified mix of recurring consumer spending. Another reason for Ulta Beauty’s strong free cash flow is its relatively efficient operating model. While Ulta operates more than 1.500 physical stores, the business does not require extremely heavy capital investments relative to its earnings power. A typical Ulta store has attractive economics and relatively short payback periods, while stores also serve multiple purposes beyond retail by acting as fulfillment hubs for digital orders. This improves asset efficiency and allows Ulta to generate strong cash flow without needing excessive ongoing investments. Capital expenditures have historically been directed toward new stores, store remodels, supply chain capabilities, digital infrastructure, and technology improvements rather than large, capital-intensive industrial assets. The loyalty ecosystem also contributes meaningfully to cash generation. With more than 46 million loyalty members driving approximately 95% of U.S. sales, Ulta benefits from repeat purchasing behavior and highly predictable customer demand. This helps the company plan inventory more efficiently, avoid unnecessary overstocking, and reduce waste, allowing a larger share of profits to turn into cash. Management has also increasingly focused on improving inventory efficiency, which should support stronger cash generation over time by ensuring the company holds the right amount of products without tying up too much cash in excess inventory. The decline in free cash flow in fiscal years 2024 and 2025 appears to have been driven primarily by elevated investments and temporary profitability pressures rather than a structural weakening of the business. In fiscal 2024, free cash flow declined mainly because capital expenditures increased significantly as Ulta invested heavily in technology infrastructure, digital capabilities, point-of-sale upgrades, and enterprise systems. These investments increased spending in the short term but were intended to improve long-term operational efficiency and support future growth. In fiscal 2025, free cash flow declined again, although it still reached one of the highest levels in the company’s history. This time the pressure came more from lower operating cash flow as Ulta faced a combination of execution challenges, competitive intensity, merchandising transitions, and strategic investments under the “Ulta Beauty Unleashed” strategy, including wellness, marketplace expansion, international growth, and the acquisition of Space NK. Despite these headwinds, Ulta still generated one of the highest free cash flow figures in its history during fiscal 2025, highlighting the underlying strength of the business. Looking ahead, Ulta Beauty is likely to remain a strong generator of free cash flow, although growth may not be perfectly linear. The key structural drivers remain intact: attractive beauty category economics, recurring customer spending, strong loyalty engagement, healthy margins, and efficient store economics. Management has also signaled a more disciplined investment approach under Kecia Steelman, emphasizing profitable growth and better alignment between SG&A growth and revenue growth. Capital expenditures are expected to normalize at more moderate levels after several years of elevated investment, while management is increasingly focused on generating returns from prior investments in digital infrastructure, stores, and supply chain capabilities. This combination suggests that free cash flow should remain strong and has the potential to gradually increase over time as newer investments mature and profitability improves. Ulta Beauty primarily uses its free cash flow in two ways. First, the company reinvests in the business to support long-term growth through store expansion, store refreshes, supply chain optimization, digital capabilities, technology upgrades, wellness initiatives, and international expansion. Management expects annual capital expenditures of roughly $400 million to $450 million to continue supporting these priorities. Second, Ulta returns a meaningful amount of cash to shareholders through share repurchases. Share buybacks have been a major part of Ulta’s capital allocation strategy for many years. In fiscal 2025 alone, the company repurchased approximately $890 million worth of shares, and management has indicated an intention to continue returning large amounts of capital to shareholders while balancing reinvestment opportunities. Because Ulta generates strong cash flow and maintains limited debt, the company has considerable flexibility to both invest for future growth and continue rewarding shareholders over time. The free cash flow yield suggests that while Ulta Beauty is trading at a more attractive valuation than usual, the stock still does not appear particularly cheap. However, we will revisit valuation later in the analysis.

Debt

Another crucial aspect to investigate is the level of debt, particularly whether a business has a manageable amount that could be paid off within a three-year period. This is typically calculated by dividing total long-term debt by earnings. However, in the case of Ulta Beauty, it is not possible to calculate this ratio because the company has no long-term debt. In fact, Ulta Beauty has been debt free since 2009, which I believe is a very positive sign. A debt-free balance sheet gives the company significant financial flexibility, especially during periods of economic uncertainty or increased competition. It also means that Ulta does not need to spend money on interest payments, allowing more cash to be reinvested into areas such as store expansion, digital capabilities, supply chain improvements, and share repurchases. The fact that Ulta Beauty has been able to grow into the largest specialty beauty retailer in the United States while remaining debt free also says something about the strength of its business model and cash generation. While there is always a possibility that the company could take on debt in the future for acquisitions or strategic investments, I do not view debt as a meaningful risk for Ulta Beauty at this point.

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Risks

Competition is a risk for Ulta Beauty because the beauty and wellness industry is highly competitive and has relatively few barriers to entry. Beauty is an attractive category due to its high margins, recurring purchases, and loyal consumer base, which has encouraged an increasing number of companies to expand into the space. While beauty has always been competitive, the number of places selling beauty products has increased significantly in recent years, creating a more crowded marketplace where companies compete on price, convenience, assortment, digital capabilities, and customer experience. Ulta Beauty competes with a wide range of players, including specialty beauty retailers, department stores, drugstores, grocery stores, salons, mass merchants, online retailers, social commerce platforms, and beauty brands selling directly to consumers. This broad competitive landscape means Ulta must continuously adapt to changing consumer preferences and maintain a strong value proposition to protect its market position. Ulta Beauty’s largest direct competitor in prestige beauty is Sephora, which benefits from the financial strength and global brand portfolio of its parent company, LVMH. Sephora competes aggressively for premium beauty customers, exclusive brand launches, and store traffic. The company has also expanded its reach through its partnership with Kohl’s, placing smaller Sephora locations inside department stores and increasing access to suburban customers, an area that has historically been one of Ulta Beauty’s strengths. Because prestige beauty is one of Ulta’s most profitable categories, stronger competition from Sephora could pressure market share, sales growth, or margins if Ulta is forced to invest more heavily in promotions, loyalty incentives, or brand partnerships to remain competitive. Amazon also represents an important competitive threat, particularly online. The company has become one of the largest beauty retailers by volume and benefits from enormous scale, logistics advantages, convenience, and aggressive pricing capabilities. While many prestige beauty brands have historically avoided Amazon to protect brand image, Amazon remains highly competitive in mass-market beauty, skincare, and wellness products. Ulta Beauty benefits from offering a more curated shopping experience and stronger brand relationships, but Amazon’s ability to compete aggressively on convenience and price creates ongoing pressure, especially for more price-sensitive consumers. Traditional retailers are also becoming more aggressive in beauty. Walmart, Target, drugstores, grocery stores, and department stores continue to invest heavily in their beauty offerings to attract customers and increase spending. Target has become particularly relevant because it has evolved from a partner into a more direct competitor. Since 2021, Ulta Beauty benefited from its shop-in-shop partnership with Target, which helped expand awareness and access to prestige beauty through more than 600 Target locations. However, Ulta Beauty and Target mutually agreed not to renew the partnership when it expires in 2026, reflecting changing strategic priorities for both companies. Going forward, Target intends to continue investing in beauty and curating an expanded assortment for its millions of weekly shoppers, while Ulta Beauty focuses on strengthening its own fully controlled ecosystem. This means Target will increasingly compete for similar beauty customers, especially consumers focused on convenience and value. Walmart has also become more aggressive, expanding its beauty assortment and increasing its focus on premium beauty brands to capture a larger share of consumer spending. Another important competitive risk is pricing pressure and promotions. Management has already acknowledged that the current environment is increasingly focused on value and remains highly promotional. As more retailers compete for beauty spending, competitors may choose to offer deeper discounts, loyalty incentives, or aggressive marketing campaigns to attract customers. While Ulta Beauty has historically maintained relatively disciplined promotions, prolonged competitive pressure could force the company to become more aggressive to protect market share. This could weigh on profitability and margins over time.

Dependence on brand partners is a risk for Ulta Beauty because the company primarily acts as a retailer rather than a manufacturer. Unlike companies that own and produce most of their own products, Ulta relies heavily on third party brands to supply the merchandise that attracts customers into its stores and digital platforms. This includes prestige beauty brands, mass-market products, salon brands, and emerging beauty companies. As a result, Ulta’s ability to grow sales, maintain customer loyalty, and differentiate itself depends significantly on maintaining strong relationships with these brand partners and continuing to offer an attractive assortment that appeals to changing consumer preferences. One of the key risks is that Ulta does not have long-term supply agreements with most of its brand partners. This means there is no guarantee that brands will continue supplying products on the same terms or prioritize Ulta in the future. Beauty brands constantly evaluate where and how their products are distributed, and some may choose to strengthen relationships with competitors, reduce wholesale partnerships, or focus more heavily on selling directly to consumers through their own websites and stores. If an important brand were to scale back its partnership with Ulta, limit product availability, or shift its focus toward competitors such as Sephora, Amazon, Target, or direct-to-consumer channels, Ulta could lose access to products that drive customer traffic and repeat purchases. This risk is particularly relevant because a relatively concentrated group of suppliers contributes a meaningful share of sales. During fiscal 2025, products supplied by Ulta Beauty’s ten largest brand partners represented approximately 51% of total net sales. This means that changes in relationships with even a few major brands could have a noticeable impact on revenue. Vendor consolidation in the beauty industry may increase this risk further because larger beauty companies gain greater bargaining power and may have more influence over pricing, promotions, distribution strategies, and shelf placement. Another important risk relates to exclusivity and product differentiation. Ulta benefits from offering certain brands or products that are permanently exclusive, temporarily exclusive, or available before competitors. These exclusive launches help create excitement, attract store traffic, and differentiate Ulta from competitors. Beauty consumers often seek out trending products or viral launches, particularly products popularized through platforms such as TikTok and Instagram. If brand partners stop granting Ulta early access or exclusivity and instead make products widely available across multiple retailers, Ulta could lose part of the differentiation that encourages customers to choose its stores over competitors. Supply constraints can also create challenges. Some prestige and emerging beauty brands may struggle to scale production quickly enough to meet Ulta Beauty’s growth ambitions, particularly as the company expands internationally and opens new locations. If brand partners cannot supply sufficient inventory to meet demand, Ulta could face empty shelves, lower product availability, or slower store ramp-ups. This may negatively affect customer satisfaction and reduce sales opportunities, especially during key shopping periods or product launches. Changing beauty trends add another layer of risk. Consumer preferences in beauty can shift quickly, often driven by influencers, social media, and changing cultural trends. Ulta’s success partly depends on identifying winning brands and trends early. If Ulta fails to build relationships with fast-growing emerging brands or if competitors secure stronger partnerships with culturally relevant brands, Ulta may struggle to maintain relevance with younger consumers. At the same time, if existing brand partners lose popularity, Ulta must quickly adjust its assortment to avoid losing traffic and sales momentum.

Shrink is a risk for Ulta Beauty because the company operates in a retail category that is particularly vulnerable to inventory loss. Shrink refers to products that are lost before they can be sold due to theft, damage, administrative mistakes, or unknown causes. While shrink is a normal part of retail, it is especially relevant for Ulta Beauty because many of the products it sells are small, expensive, easy to conceal, and highly desirable. Items such as fragrances, prestige skincare, cosmetics, and beauty tools can often be stolen relatively easily and resold through online marketplaces or informal channels. This makes beauty retail an attractive target for theft, including increasingly sophisticated organized retail crime. Shrink can affect Ulta Beauty in several ways. The most direct impact is lower profitability. When products are stolen or damaged, Ulta has already paid suppliers for that inventory but receives no revenue in return. Unlike expenses such as marketing or store investments, shrink creates no benefit for the business and directly reduces margins. Even relatively small increases in shrink can have an outsized impact on earnings because the lost inventory represents almost pure profit that disappears. Ulta Beauty has already acknowledged that shrink in recent years has increased above historical levels and has negatively affected financial performance. The rise in organized retail crime has made this risk more difficult to manage. In recent years, retailers across the United States have reported increasing incidents of coordinated theft, where groups target stores to steal high-value products that can later be resold online or through secondary markets. Beauty products are particularly vulnerable because they are portable, recognizable, and often retain value after resale. This means Ulta Beauty may face ongoing pressure if organized theft remains elevated or becomes more sophisticated over time. Another challenge is that efforts to reduce shrink can create tradeoffs with the customer experience. To limit theft, retailers often introduce measures such as locked displays, security tags, surveillance systems, product placement changes, or additional in-store security personnel. While these actions may reduce losses, they can also make shopping less convenient or less enjoyable. For a company like Ulta Beauty, which positions itself as an inviting and discovery-oriented beauty destination, too much visible security or restricted access to products could negatively affect the shopping experience and potentially reduce sales. Customers may become frustrated if products are harder to access or if the store environment feels less welcoming. There is also a cost component to managing shrink. Reducing theft often requires higher spending on labor, technology, and store security infrastructure. Ulta Beauty may need to invest more in surveillance systems, inventory tracking, employee training, or store redesigns to better protect high-value merchandise. While these investments may reduce losses over time, they can also increase operating costs and pressure margins in the short term. Shrink may also complicate inventory management and product availability. If products are stolen faster than expected, stores may experience stock shortages, particularly for high-demand prestige brands or viral products. Empty shelves or missing products can hurt customer satisfaction and encourage consumers to shop elsewhere, especially in a category where convenience and discovery are important. If shoppers repeatedly cannot find the products they want, Ulta risks losing both sales and customer loyalty. Shrink does not necessarily represent a structural threat to Ulta Beauty’s business, and management has already taken operational steps to address the issue. However, because the company sells many high-value and easily resold products, shrink is likely to remain an ongoing challenge.

Reasons to invest

The product portfolio is a reason to invest in Ulta Beauty because it represents one of the company’s strongest competitive advantages and an important driver of long-term growth. Beauty is a category where consumer preferences evolve quickly, often influenced by social media, celebrities, wellness trends, and changing beauty routines. To remain relevant, retailers must continuously refresh their assortment and stay ahead of emerging trends. Ulta Beauty has demonstrated a strong ability to do this by offering a broad portfolio that spans everything from affordable entry-level products to luxury beauty, while constantly introducing new brands and products that keep customers engaged. Management has emphasized that “newness” remains one of the most important growth drivers in beauty, with approximately 20% to 30% of Ulta Beauty’s recent growth coming from new brands, products, and launches. One of Ulta Beauty’s biggest strengths is the breadth of its assortment. The company offers products across cosmetics, skincare, fragrance, haircare, wellness, salon products, and beauty tools, while covering all price points from mass-market to luxury. This “low to lux” positioning gives Ulta Beauty a strategic advantage because it allows consumers to stay within the Ulta ecosystem regardless of budget or economic conditions. During periods of stronger consumer spending, customers may trade up to prestige brands and premium skincare routines. During more difficult periods, those same customers can shift toward more affordable products without leaving Ulta Beauty altogether. This broad assortment also allows Ulta to serve multiple demographics, from younger Gen Z consumers experimenting with trends to older consumers focused on premium skincare or wellness. Another reason the product portfolio is attractive is Ulta Beauty’s ability to continuously refresh and modernize its assortment. In fiscal 2026 alone, the company introduced more than 100 new brands, including names such as Cécred, medicube, Moroccanoil, TIRTIR, Peach & Lily, NOYZ, and DIBS. Some launches have been highly successful, such as Cécred becoming the largest prestige haircare launch in Ulta Beauty’s history and Rare Beauty by Selena Gomez becoming a record-breaking launch that created strong momentum within makeup. While no single brand determines the future of the business, management has highlighted that a steady cadence of newness helps drive customer engagement, attract new loyalty members, and encourage repeat visits. Ulta Beauty also benefits from a growing portfolio of exclusive and differentiated products. Exclusive launches and early access to trending brands help create excitement and give customers a reason to choose Ulta over competitors. Management has increasingly focused on building stronger portfolios of exclusive brands and products that meaningfully differentiate the company’s assortment. This not only helps attract new customers but also strengthens loyalty among existing shoppers. In beauty retail, consumers often follow trends or seek out specific products popularized on platforms such as TikTok and Instagram. Having exclusive or early access to these products can create a meaningful competitive advantage. The company is also becoming increasingly sophisticated in how it builds its assortment. Historically, Ulta Beauty focused heavily on bringing in major established brands. Today, management is increasingly focused on finding “whitespace opportunities,” meaning brands that complement rather than cannibalize the existing assortment. This includes identifying emerging independent brands, K-beauty trends, wellness categories, and influencer-led products before they become mainstream. For example, Ulta Beauty has become the largest brick-and-mortar K-beauty retailer in the United States, with successful launches of brands such as ANUA and medicube. Importantly, management has emphasized that it focuses on product quality and long-term staying power rather than simply chasing short-term hype, which may help reduce the risk of trend-driven volatility. The product portfolio also positions Ulta Beauty well to benefit from structural beauty trends. Management sees continued opportunities in areas such as K-beauty, wellness, fragrance layering, premium haircare, and products addressing needs created by GLP-1 medications, such as skincare focused on hydration and products addressing hair thinning. Fragrance has also become an important growth category, particularly among younger male consumers entering the category for the first time. Because Ulta Beauty operates across many categories, it has flexibility to shift emphasis toward whichever trends are resonating most strongly with consumers at a given time.

Opening new stores is a reason to invest in Ulta Beauty because store expansion continues to represent one of the company’s clearest avenues for long-term growth. Despite already operating more than 1,500 stores in the United States, management still sees meaningful opportunity to expand the footprint further while also growing internationally. Importantly, Ulta Beauty’s stores are not just points of sale. They function as omnichannel hubs, discovery destinations, and service centers where customers can explore products, receive salon services, and engage with beauty experts. Because beauty remains a category where consumers often prefer to test, compare, and discover products in person, physical stores continue to play an important role even as e-commerce grows. This gives Ulta Beauty an advantage compared to many retailers that face declining store relevance. One of the main reasons store expansion is attractive is that Ulta Beauty has historically demonstrated strong store economics. Management estimates that a typical U.S. store requires approximately $2,4 million in investment, including inventory and pre-opening costs, while mature stores have historically generated attractive profitability and returns on capital. New stores also strengthen brand awareness, support loyalty member acquisition, and create additional convenience for customers. Importantly, stores do not operate in isolation. They help strengthen the entire ecosystem by supporting buy online pick up in store, same day delivery, ship from store capabilities, and salon appointments, making each location more productive over time. There is still room for growth in the United States. Management believes Ulta Beauty can eventually operate more than 1.800 freestanding stores domestically, suggesting several hundred additional locations over time. To support this opportunity, Ulta Beauty has introduced new smaller-format stores that provide greater flexibility to enter smaller markets or shopping centers where traditional 10.000 square foot stores may not make economic sense. This allows the company to penetrate underserved areas while maintaining disciplined capital allocation. In fiscal 2026 alone, Ulta opened 63 net new stores and remodeled 42 existing locations, reflecting continued confidence in the long-term attractiveness of physical retail. International expansion represents an additional and potentially important growth opportunity. Historically, Ulta Beauty was almost entirely dependent on the U.S. market, which naturally limited geographic growth. That changed significantly in fiscal 2026, when the company expanded into five countries through a combination of acquisitions, partnerships, and franchise agreements. The acquisition of Space NK immediately gave Ulta Beauty access to more than 80 stores in the United Kingdom and Ireland, while partnerships with Grupo Axo and Alshaya helped launch stores in Mexico and the Middle East. Management views these markets as attractive because beauty remains a global growth category with favorable long-term demand trends. The acquisition of Space NK appears particularly important because it gives Ulta Beauty immediate scale in the growing U.K. prestige beauty market. Rather than entering organically and building a business from scratch, Ulta acquired an established retailer with strong brand curation, premium positioning, and an experienced local management team. Management has described the acquisition as “1 plus 1 equals 3,” suggesting meaningful opportunities to combine Ulta Beauty’s scale, buying power, operational expertise, and loyalty capabilities with Space NK’s strengths in storytelling, prestige brand relationships, and smaller high-street store formats. Space NK also gives Ulta Beauty exposure to premium brands that are not yet part of its existing assortment, which may create opportunities for future cross-pollination between the two businesses. Another attractive aspect of Ulta Beauty’s international strategy is that it remains relatively asset light. In Mexico and the Middle East, the company is expanding through partnerships with Grupo Axo and Alshaya rather than investing heavily in company-owned operations. This reduces financial risk while still allowing Ulta Beauty to benefit from brand royalties, international growth, and local expertise. Management has indicated plans to continue opening additional stores through these partnerships, suggesting that international expansion could remain a long-term contributor to growth without requiring excessive capital investment.

Digital and personalization capabilities are a reason to invest in Ulta Beauty because the company has successfully built an increasingly integrated omnichannel ecosystem that strengthens customer loyalty, improves convenience, and helps drive long-term growth. Beauty is a category where inspiration, discovery, and personalization matter greatly, and consumers increasingly move seamlessly between physical stores, apps, social media, and digital content before making purchases. Ulta Beauty has recognized this shift and invested heavily in digital capabilities that complement rather than replace its physical store network. This strategy allows the company to remain highly relevant as consumer shopping habits evolve while strengthening relationships with existing customers and attracting new ones. One of Ulta Beauty’s greatest strengths is the combination of its digital ecosystem with its loyalty program. The company ended fiscal 2026 with a record 46,7 million active loyalty members, growing 5% year over year. These members account for approximately 95% of sales, giving Ulta Beauty valuable insight into consumer preferences, shopping habits, and purchasing behavior. Because beauty is highly personal and often repetitive, this data allows Ulta to personalize recommendations, promotions, and communication in ways that make the shopping experience more relevant for each customer. Management has increasingly emphasized one-to-one personalization, leveraging automation and real-time content to better tailor the guest experience. This may improve customer retention, increase spending per customer, and strengthen long-term loyalty. The company has also built a strong digital platform that works closely with its physical stores. Rather than treating online and offline shopping separately, Ulta Beauty operates an omnichannel model where stores support digital fulfillment through options such as buy online pick up in store, same-day delivery, and ship-from-store capabilities. Management has highlighted that omnichannel customers tend to be significantly more valuable than customers who only shop in one channel. This suggests that investments in digital engagement do not simply shift spending online but can increase overall customer lifetime value. Mobile engagement is becoming an increasingly important driver of the business. Approximately 60% of Ulta Beauty’s online sales now come through its app, while active app users increased 15% year over year. This is important because the app strengthens engagement between purchases by allowing customers to browse products, receive personalized offers, discover trends, and interact with loyalty rewards. In beauty retail, remaining top of mind matters because purchasing decisions are often influenced by trends, routines, and social inspiration. A highly engaged app user is therefore more likely to remain within the Ulta ecosystem when making beauty purchases. Ulta Beauty is also embracing newer forms of digital commerce that may create additional growth opportunities. One example is its launch on TikTok Shop, where customers can purchase products directly while engaging with beauty content and creators on the platform. Management sees this not only as a sales channel but also as a guest acquisition tool that places Ulta where younger consumers increasingly spend their time. Beauty products often go viral through social media, and management noted that products trending on TikTok frequently sell out in Ulta stores as well. By integrating directly into platforms where beauty trends emerge, Ulta Beauty may strengthen its relevance and increase its ability to participate in viral moments rather than simply reacting to them. Importantly, Ulta Beauty appears to be approaching social commerce in a differentiated way. Rather than competing mainly through heavy discounting, management has emphasized curated assortments and bundled offerings across multiple brands, which better reflects how beauty consumers actually shop. This approach may help protect margins while creating excitement and increasing average basket sizes. Management also noted that thousands of creators have already shown interest in partnering with Ulta Beauty on TikTok Shop, potentially strengthening awareness and customer acquisition. Additional digital initiatives such as UB Marketplace and UB Media further strengthen the ecosystem. Marketplace expands the assortment available online with more than 200 brands and thousands of additional products without requiring shelf space in stores. Meanwhile, UB Media allows beauty brands to advertise directly to Ulta’s highly engaged customer base using loyalty insights, creating an additional revenue stream while deepening relationships with brand partners.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 26,64, which is from the fiscal year 2026. I have selected a projected future EPS growth rate of 7%. Finbox expects EPS to grow by 7,1% a year in the next five years. Additionally, I have selected a projected future P/E ratio of 14, which is double the growth rate. This decision is based on Ulta Beauty's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $174,64. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Ulta Beauty at a price of $87,27 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 1.503, and capital expenditures were 435. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 305 in our calculations. The tax provision was 374. We have 44,4 outstanding shares. Hence, the calculation will be as follows: (1.503 – 305 + 374) / 44,4 x 10 = $354,05 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation 24,07 and a growth rate of 7%, if you want to recoup your investment in 8 years, the Payback Time price is $264,24.

Conclusion

I believe that Ulta Beauty is an intriguing company with strong leadership. The company has built a moat through its unique mass to prestige beauty model, extensive store network, strong loyalty program, valuable customer data, deep brand relationships, and an in-store experience that cannot easily be replicated online. The company has consistently achieved a high ROIC, which is a trend that I expect to continue moving forward due to its attractive store economics, strong customer loyalty, and disciplined capital allocation. Free cash flow is also expected to increase over time as Ulta Beauty benefits from previous investments in technology, digital capabilities, supply chain optimization, and international expansion. Competition is a risk for Ulta Beauty because the beauty industry is becoming increasingly crowded, with competitors ranging from Sephora and Amazon to Walmart, Target, and direct-to-consumer brands competing on price, convenience, assortment, and customer experience. As competition intensifies and promotional activity increases, Ulta Beauty may face pressure on market share, margins, and profitability if it needs to invest more heavily in discounts, loyalty incentives, or brand partnerships to remain competitive. Dependence on brand partners is another risk because Ulta relies heavily on third party brands to supply the products that attract customers, yet it has no long-term supply agreements with most of these partners. If major brands reduce supply, prioritize competitors, focus more on direct-to-consumer channels, or stop granting exclusive launches, Ulta could lose access to products that drive traffic, differentiation, and sales growth. Shrink is also a risk because the company sells many small, expensive, and easily resold products, making it particularly vulnerable to theft and inventory loss, including organized retail crime. Higher shrink directly reduces profitability, while efforts to reduce theft through increased security or restricted product access may raise costs and negatively affect the customer experience. The product portfolio is a reason to invest in Ulta Beauty because the company offers a broad assortment across all price points and beauty categories, allowing it to serve a wide range of consumers while keeping customers within the Ulta ecosystem regardless of budget or trends. Combined with a strong focus on newness, exclusive launches, and emerging categories such as K-beauty and wellness, the product portfolio helps drive customer engagement, loyalty, and long-term growth. Opening new stores is another reason to invest because store expansion remains one of the company’s clearest avenues for long-term growth in both the United States and internationally. New stores strengthen brand awareness, support loyalty growth, and benefit from attractive store economics, while international expansion through Space NK and asset-light partnerships provides additional growth opportunities beyond the U.S. market. Digital and personalization capabilities further strengthen the investment case because Ulta Beauty combines its physical stores, digital platforms, and loyalty ecosystem of 46,7 million active members to deliver increasingly personalized experiences and strengthen customer relationships. Through its app, AI-driven personalization, TikTok Shop, and initiatives such as Marketplace and UB Media, Ulta Beauty is improving engagement, attracting younger consumers, and positioning itself to benefit from changing shopping habits. Overall, I believe there are many things to like about Ulta Beauty, and buying shares at the Ten Cap price of $354 could prove to be a good long-term investment.

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