Ulta Beauty: Don't underestimate the lipstick effect.

Ulta Beauty is the largest specialty beauty retailer in the United States, offering a unique combination of prestige, mass, and salon products alongside in store services and a strong digital platform. Its loyalty program and brand partnerships have supported steady growth. The lipstick effect suggests that beauty often performs well even during economic downturns, as shown in a study from Texas Christian University. The question is: Can Ulta Beauty continue to deliver strong returns across all economic environments?

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. 

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The Business

Ulta Beauty, founded in 1990, is the largest specialty beauty retailer in the United States. It offers a unique and comprehensive shopping experience that brings together mass, prestige, and professional beauty products alongside a wide array of in-store services. With over 1.445 freestanding stores and more than 500 shop-in-shops inside Target locations, Ulta reaches customers across all 50 states through both physical locations and a robust e-commerce platform. Its product mix spans cosmetics, skincare, haircare, fragrance, bath and body, salon styling tools, and private label offerings, while nearly all locations include full-service salons that provide haircuts, makeup applications, brow services, and ear piercings. Ulta’s business model addresses the historical fragmentation in the beauty retail space by offering all beauty categories and services under one roof. This “all things beauty, all in one place” concept has enabled the company to become a dominant player in a resilient and emotionally engaging category. Beauty remains a high-engagement segment, and Ulta’s positioning as an affordable yet premium destination continues to resonate with consumers even during uncertain economic times. Ulta’s competitive moat is built on its comprehensive product offering, powerful loyalty ecosystem, strong vendor relationships, and integrated omnichannel experience. The company’s customer base is anchored by its Ultamate Rewards program, which includes 43,3 million active members responsible for over 95 percent of total sales. The loyalty program is not just a tool for retention but a key competitive asset, enabling Ulta to personalize marketing, optimize inventory, and deepen engagement. Members can earn and redeem points across channels, including Ulta Beauty at Target, helping to reinforce brand loyalty and increase spending. Ulta’s competitive edge is further enhanced by its ability to serve a wide range of consumer preferences and price points, from drugstore staples to luxury exclusives. The company maintains strong relationships with major beauty players like Estée Lauder and L’Oréal, and offers access to products that are either permanently or temporarily exclusive. This, combined with its growing private label, helps drive margin expansion and customer interest. In recent years, Ulta has focused on expanding its digital capabilities and enhancing the omnichannel experience. Its digital platform supports services such as virtual try-ons, AI-driven skin analysis, and flexible fulfillment options including same-day delivery and curbside pickup. Ulta’s omnichannel shoppers typically spend nearly three times as much as store-only customers, making the integration of online and in-store experiences a core strategic priority.

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, she has held key roles including Chief Store Operations Officer, Chief Operating Officer, and most recently, President and COO. In each of these positions, Kecia Steelman has been instrumental in scaling Ulta’s operations, deepening its guest-centric culture, and advancing its omnichannel capabilities. Before joining Ulta Beauty, she built a strong foundation in retail leadership through roles at Family Dollar, Home Depot, and Target Corporation, where she began her career and worked her way up from an hourly in-store position to senior leadership over a span of 12 years. This early experience informs her leadership style today: grounded, execution-oriented, and deeply appreciative of the role every team member plays in retail success. As CEO, Kecia Steelman is responsible for driving Ulta Beauty’s long-term strategic vision while protecting and enriching the company’s inclusive, high-performance culture. Her first months in the role were marked by swift, intentional action: engaging closely with associates and brand partners, streamlining decision-making structures, and shifting resources toward growth areas, all while reinforcing Ulta’s foundational strengths. She describes her leadership approach as decisive, team-focused, and fast-moving, with a clear preference for forward momentum over stagnation. What sets Kecia Steelman apart is her unique blend of strategic leadership and front-line credibility. Having risen through the ranks in retail, she brings a rare combination of vision and operational empathy, earning the trust of Ulta’s teams and reinforcing the company’s cultural advantage. She is known for saying, “If I did it, anyone else can do it too,” and views herself as a role model for opportunity and upward mobility in the retail industry. Under her leadership, Ulta Beauty is focused on reinforcing its market position, elevating the customer experience, and continuing to evolve alongside changing consumer expectations. She currently serves on the boards of The Bay Club Company and the Adler Planetarium. With her experience, practical leadership style, and deep understanding of both the business and its people, Kecia Steelman is well-positioned to lead Ulta Beauty into its next chapter of growth.

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 consistently achieved a high ROIC, with figures exceeding 20% in every year over the past decade, except for fiscal year 2021, which was affected by the pandemic. (Ulta’s fiscal year runs from February to January, so fiscal year 2021 covers February 1, 2020 to January 31, 2021.) There are several reasons why Ulta continues to deliver such strong returns on invested capital. First, its integrated retail model combines mass and prestige beauty products with salon services under one roof, making it convenient for customers and encouraging higher spending per visit. Second, its loyalty program, Ultamate Rewards, has over 43 million active members and drives more than 95% of sales. This high level of engagement leads to repeat purchases and gives Ulta valuable insights into customer preferences. Third, the company maintains a strong balance sheet with minimal debt, enabling it to make targeted investments in store expansion and digital capabilities without financial strain. These factors help Ulta earn much more from its investments than they cost to make, showing that the company uses its capital wisely and holds a strong position in the market. ROIC did decrease slightly in fiscal year 2025. This was primarily due to the launch of Ulta’s “Ulta Beauty Unleashed” plan, which involved significant upfront investments in areas such as wellness, e-commerce, and international expansion. These initiatives temporarily impacted profitability. Additionally, the company faced execution issues during product transitions and new process rollouts, which affected in-store presentation and the guest experience. Increased competition from both traditional and online retailers also led to more promotions and pricing pressure, further weighing on margins. While these factors contributed to a short-term dip in ROIC, they reflect Ulta’s focus on long-term strategic priorities. The company’s leadership remains confident that these investments will strengthen Ulta’s competitive position and drive sustainable value creation over time.

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 consistently increased its equity every year for the past 10 years, with the exception of fiscal year 2022. I will give Ulta Beauty a pass for the numbers in 2022, as the company made significant investments in its IT systems during that fiscal year. Ulta’s equity reached a record high in fiscal year 2025 mainly because the company continued to generate profits even while making large investments in new areas like wellness, ecommerce, and international growth. Rather than paying out all of these profits to shareholders, Ulta retained a portion of them within the business, which directly added to equity. At the same time, the company avoided taking on significant debt to fund its initiatives, choosing instead to use its own cash. This approach, reinvesting profits while keeping debt low, helped equity grow steadily.

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. It is not surprising that Ulta Beauty has managed to maintain positive free cash flow over the past ten years. The company has increased its free cash flow in most of those years, with the exception of fiscal 2021, which was impacted by the pandemic, and the past two years, when both free cash flow and the levered free cash flow margin declined in fiscal 2024 and fiscal 2025. The decline in fiscal 2024 was primarily due to a 39,5 percent increase in capital expenditures compared to 2023. This increase was driven by strategic investments in technology infrastructure, including upgrades to point of sale systems and enterprise platforms. These higher investments help explain the drop in free cash flow for the year. In fiscal 2025, free cash flow declined again, despite a reduction in capital expenditures. This time, the decrease was mainly due to lower operating cash flow, which was affected by a mix of strategic investments, operational challenges, and competitive pressures. These are the same factors that contributed to the slight dip in ROIC. Management has indicated that these investments are intended to enhance Ulta's competitiveness and reignite long term growth in market share, although they expect profitability to remain under pressure in fiscal year 2026. In other words, short term headwinds are expected in exchange for long term gains. It is worth noting that despite these challenges, Ulta still delivered its third highest free cash flow ever. As the company grows its free cash flow over time, investors can likely expect more buybacks. Since launching its share repurchase program in 2014, Ulta has returned 6,8 billion dollars to shareholders. The free cash flow yield is currently at its highest level in the past decade, suggesting that the stock may be trading at an attractive valuation. 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 as the company has no debt. In fact, Ulta Beauty has been debt free since 2009, which I believe is a very positive sign and suggests that debt is unlikely to become a concern in the future.

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Risks

Competition is a risk for Ulta Beauty. The beauty and salon industries are highly competitive and constantly evolving, with few barriers to entry and many types of competitors. These include traditional department stores, drugstores, specialty retailers, online platforms, and direct to consumer brands. In recent years, the level of competition has intensified, especially in the prestige beauty category. Across the market, more than 1.600 new locations or channels have started selling prestige beauty products. This includes new stores opened by existing competitors, as well as brands expanding their online presence or partnering with large retailers to reach more customers. As a result, prestige beauty products are now available in more places than ever before, which has made it harder for Ulta to stand out. By the end of fiscal year 2024, over 90 percent of Ulta stores had been affected by at least one new competitor opening nearby, and about two thirds had been impacted by multiple competitors in the same area. For the first time, Ulta lost market share in the beauty category, showing how much the environment has changed. Customer expectations are rising, new brands and retailers are entering the market quickly, and the pace of change is increasing. While beauty has always been a competitive space, the recent increase in places selling beauty products has been unlike anything seen before. Companies of all sizes, from small local salons to large national chains and online platforms, are now offering similar products and competing on convenience, price, and experience. Many of these competitors have more financial resources or larger marketing budgets, which allows them to react faster, promote more aggressively, or grow their reach more quickly.

Dependence on brand partners is a risk for Ulta Beauty. As a retailer, Ulta primarily sells products made by other companies. This means that it does not control the manufacturing or long term supply of the items it sells. Instead, its business relies heavily on maintaining strong relationships with third party brands across prestige, mass, and salon categories. Ulta does not have long term supply agreements with its brand partners, so there are no guarantees that these partners will continue providing products at the same levels or on favorable terms. Any deterioration in these relationships - whether from business decisions, supply chain constraints, or competitive shifts - could limit Ulta’s ability to stock a broad and attractive product assortment. If a brand partner were to change its distribution strategy, reduce supply, or prioritize a competitor, Ulta could lose access to key products or experience lower inventory availability. That could hurt sales, limit customer satisfaction, and ultimately damage its financial performance. Ulta also benefits from exclusive or early access to certain products and brands. These exclusives are important for customer traffic and differentiation. If brand partners were to stop offering Ulta these exclusive rights or give similar access to competitors, Ulta could lose a competitive advantage. Additionally, as Ulta continues to grow and open new locations, it relies on its brand partners to provide enough inventory to support that growth. Not all partners may be able to scale their supply to match Ulta’s pace. If Ulta cannot secure enough product to meet demand or fill shelves in new stores, its expansion plans could be affected.

Shrink is a risk for Ulta Beauty. Shrink refers to the loss of inventory that occurs due to theft, damage, administrative errors, or other unknown causes. It is a common challenge in retail, but for a company like Ulta that carries a large volume of small, high-value items - such as cosmetics, fragrances, and skincare products - the risk is particularly pronounced. Ulta has historically dealt with some level of shrink, which is typical for the industry. However, the company has recently reported that shrink has increased above historical levels. This means a larger portion of its inventory is being lost before it can be sold, which directly reduces profitability. The issue is driven in part by rising incidents of theft, including organized retail crime, which has become more frequent and sophisticated across the retail sector. Shrink is especially damaging because it affects margins in a way that is hard to control. Products that disappear due to theft or damage represent a total loss, Ulta has already paid for the inventory but earns no revenue from it. Unlike normal business expenses, shrink is not offset by any benefit or service and can erode earnings if not managed properly. To counter this, Ulta has taken operational and strategic actions, such as increasing security, adjusting store layouts, or limiting access to certain products. While these measures may reduce shrink, they can also negatively impact the customer experience. For example, locked displays or visible security measures can create friction for shoppers, potentially hurting sales or damaging brand perception. There is also a financial tradeoff. Preventing shrink often requires investing in labor, technology, or physical infrastructure, which can increase costs.

Reasons to invest

Ulta Beauty Unleash is a reason to invest in Ulta Beauty because it is a focused plan to strengthen the company’s core business and expand its long term advantages. At its heart, the strategy is about getting back to operational excellence - running clean, well stocked, easy to navigate stores, and making sure each guest interaction is consistent, personal, and aligned with Ulta’s brand promise. This return to basics, while simple on the surface, is essential for reinforcing Ulta’s leadership in a highly competitive category. One of the key priorities of the Unleash plan is brand building. Ulta is leaning into its ability to work closely with both emerging and established beauty brands in ways that go beyond traditional retail. The company is expanding the number of exclusive partnerships available only at Ulta. These exclusives draw customers in and create clear differentiation from competitors, both online and in stores. Investing in brand building also strengthens Ulta’s position in the beauty ecosystem, making it a preferred partner for the next generation of must have products. Another focus is digital acceleration. Ulta is improving its app and website to create a more personalized and seamless experience. With greater automation and real time content, the goal is to better serve guests and drive more online engagement. These efforts enhance Ulta’s omnichannel model and help the company stay competitive in a retail environment where digital convenience is increasingly expected. Personalization is also a central pillar. Ulta has a large and highly engaged loyalty base, and through smarter use of data and targeted communication, it aims to deepen customer relationships and boost long term value. Personalized offers, recommendations, and content can increase repeat visits, improve conversion, and reinforce brand loyalty. Altogether, Ulta Beauty Unleash is not just a short term improvement plan, but a strategic effort to strengthen what the company already does well. By focusing on areas like brand partnerships, digital engagement, and personalized customer experiences, Ulta is positioning itself to stay ahead of the competition and deliver lasting value to its shareholders.

Opening new stores is a reason to invest in Ulta Beauty because it directly supports the company’s growth strategy, profitability, and ability to capture additional market share. Ulta has a proven and disciplined approach to store expansion, using rich data from its loyalty program to identify high-potential areas where new locations can serve unmet demand or deepen presence in existing markets. Rather than simply increasing store count for its own sake, Ulta focuses on quality growth, ensuring each new store is positioned to perform well and contribute to the bottom line. In fiscal 2024, Ulta opened 60 net new stores and remodeled 41 others, with plans to open 200 more over the next three years. These openings are not only financially sound - management reports that the store fleet remains highly profitable - but they also reflect confidence in Ulta’s ability to grow within its existing footprint. Even in a competitive retail environment, Ulta sees meaningful opportunities to expand in a profitable and targeted way, with flexible store formats and layouts that can adapt quickly to new brand partnerships and trends. Importantly, Ulta’s physical stores continue to be the foundation of the business, accounting for around 80 percent of total sales. While ecommerce is growing, beauty remains a category where in-person discovery, consultation, and human connection matter deeply. The stores support services like hair, brow, and skin treatments, enable product testing, and create brand experiences that online platforms cannot replicate. In this context, each new store is more than just a sales outlet, it is a channel for deeper engagement and long term customer loyalty. In addition to its standalone locations, Ulta is expanding through its successful partnership with Target. The Ulta Beauty at Target program adds curated prestige beauty offerings inside Target stores, bringing Ulta to new customer segments and generating royalty income. This helps grow the brand’s reach and relevance, especially in areas where opening a full Ulta store may not yet make sense.

Wellness is a compelling reason to invest in Ulta Beauty because it represents a significant growth opportunity in a space that naturally complements the company’s core beauty offering. The broader wellness category is already a massive industry, valued at around 400 billion dollars and growing faster than the beauty market itself. Ulta is strategically positioning itself to benefit from this trend by expanding its presence in wellness. So far, Ulta has dedicated about eight feet of shelf space in most locations to wellness, but the company is actively working to grow that footprint. Plans for 2025 include the rollout of at least 20 new wellness brands, an expanded product assortment, and redesigned in-store presentations in select locations. These changes aim to turn a small but growing section of the store into a more meaningful contributor to both sales and guest engagement. What makes wellness especially attractive from an investment standpoint is that it builds on Ulta’s existing strengths: trusted relationships with consumers, a highly engaged associate base, and a reputation for creating approachable, supportive in-store experiences. Ulta’s research shows that guests already rely on the company not only for beauty, but for more personal and evolving needs tied to health, self care, and different life stages. Another key point is that Ulta does not see wellness as a replacement for beauty, but as an additional category. Rather than cannibalizing existing sales, wellness can increase total basket size and encourage more frequent visits - especially as consumers increasingly connect feeling good with looking good. It also helps Ulta make better use of store space by replacing lower performing categories with more relevant and in-demand wellness products. Wellness also strengthens Ulta’s relevance with younger consumers, many of whom see wellness as part of their identity and daily routine. And because the category is still highly fragmented, with no clear market leader, Ulta has a real opportunity to become a trusted name in wellness both in store and online.

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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 26,03, which is from the fiscal year 2025. I have selected a projected future EPS growth rate of 12%. Management expects long-term low-double-digit EPS growth. Additionally, I have selected a projected future P/E ratio of 16, 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 $466,90. 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 $233,45 (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 1.339, and capital expenditures were 375. 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 263 in our calculations. The tax provision was 379. We have 46,4 outstanding shares. Hence, the calculation will be as follows: (1.339 – 263 + 379) / 46,4 x 10 = $313,58 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation 20,79 and a growth rate of 12%, if you want to recoup your investment in 8 years, the Payback Time price is $286,40.

Conclusion

I believe that Ulta Beauty is an intriguing company with strong leadership. The company has built a moat through its broad product offering, powerful loyalty program, trusted vendor relationships, and integrated omnichannel experience. Ulta Beauty has consistently delivered a high return on invested capital in every year except during the pandemic. It has also generated strong free cash flow, and while free cash flow declined over the past two years, this has mainly been due to investments aimed at creating long-term value. Competition is a risk for Ulta Beauty because the beauty industry has become increasingly crowded. New retailers, online platforms, and direct to consumer brands continue to expand, especially in prestige beauty. With more than 1.600 new distribution points and over 90 percent of Ulta stores impacted by nearby competitor openings, it has become harder for the company to stand out, leading to its first loss of market share in 2024. Dependence on brand partners is also a risk, as Ulta does not manufacture its own products and relies on third party brands for supply. Without long term agreements in place, any disruption in these relationships or shift in distribution strategies could limit product availability, reduce customer traffic, and weaken Ulta’s market position. Shrink is another concern. Rising inventory losses from theft, damage, or other causes reduce profitability and are difficult to control, especially given the small size and high value of many of Ulta’s products. While the company is taking action to reduce shrink, these measures can raise costs or affect the customer experience. Ulta Beauty Unleash is a reason to invest in the company because it is a strategic plan focused on strengthening core operations and expanding long term advantages in areas like brand partnerships, digital engagement, and personalization. By improving store execution and deepening guest relationships, the plan aims to help Ulta stand out in a competitive landscape and deliver sustained shareholder value. Opening new stores is also a reason to invest. It supports profitable growth and reinforces Ulta’s strength in categories where in-person experience matters. With a data driven approach to site selection and a productive store base, Ulta is expanding in a focused way while also reaching new audiences through the Ulta Beauty at Target partnership. Wellness is another promising growth driver. It is a fast growing category that complements Ulta’s existing strengths in trust, customer connection, and in store experience. By expanding its wellness assortment, Ulta can grow basket sizes, engage younger consumers, and build a leading position in a fragmented and underserved market. There are many things to like about Ulta Beauty, and I believe buying shares at the Ten Cap price of 313 dollars could be a good long term investment.

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