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Analyst: Nan Zhang Zifan Zhou April.18 2019

Analyst: Nan Zhang Zifan Zhou April.18 2019. Summary of ULTA. Industry-Leading Financial Performance. Drivers. Sales Drivers : Loyalty/ initiatives driving higher sales per member AI/ personalization E-commerce New customer acquisition –consumer expansion framework

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Analyst: Nan Zhang Zifan Zhou April.18 2019

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  1. Analyst: Nan Zhang Zifan Zhou April.18 2019

  2. Summary of ULTA

  3. Industry-Leading Financial Performance

  4. Drivers • Sales Drivers: • Loyalty/ initiatives driving higher sales per member • AI/personalization • E-commerce • New customer acquisition –consumer expansion framework • New brands, success with digitally native brands • Improved guest experience • Salon optimization • Store maturation • Margin Drivers: • Credit card program benefits • Corporate overhead leverage • Rent and occupancy leverage as fleet of stores matures • Working capital improvement • Efficiencies for Growth program

  5. Drive AWARENESS Drive MEMBER RETENTION AND SHARE OF WALLET Drive NEW MEMBER ACQUISITION Real Estate Model: Projects store build out of 1400 to 1700 stores Now 1174 stores

  6. Accelerated Unaided Awareness with Key Consumers African American +15 pts Millennials + 14 pts. Latina +19 pts. Gen Z +20 pts. Connect with a relevant experience Communicate in meaningful ways Deliver the right products and services Source: Hall & Partners, Ulta Beauty Brand Tracker, October 2016 through September 2018

  7. Beauty Enthusiasts’ Purchasing Behavior Majority of guests’ purchases are items they have not purchased before Replenishment-only purchases are limited ~30% 3.5% 90% + 84%

  8. Adapting to the Changing Landscape

  9. Partnering with Digitally Native Brands Exclusive Products represent more than 9% of Sales • Exclusive in brick and mortar • Founder brand rooted in artistry • Launched in 300 stores on an endcap in 2017

  10. Evolution of Brand from Transactional to Emotional Future of retail: Physical, Digital, Emotional • Ulta beauty takes care of me • I get the beauty butterflies when I shop at Ulta • They always know what’s going to work for me! • I shop because it’s convenient • I can redeem my points for good deals...on great products • You have products I want

  11. Growing and Enhancing Most Valuable Asset Driving Rapid Growth as Improved the Guest Experience On-line assortment at parity with store, end-to-end operating foundation Building omni-channel capabilities: Store locator, store 2 door, BOPIS, 3 day shipping Improved site and app experience, launched Glamlab Significant addition of on-line only brands, new on-line checkout

  12. Digital Innovation Stronger Focus on

  13. SWOT ANALYSIS Strengths Weaknesses S W • Increasing Trade Receivables • Distribution Network • Sustained Financial • Growth Multi-Channel Selling O T Opportunities Threats • Increase in Consumer Spending in the US • Growing E-commerce Market in the US • Expanding Retail Market in the US • Labor costs in the US • Intense Competition • Stringent Regulations

  14. Industry

  15. Economic Driver in Cosmetic Industry Source: World Bank Data Source: www.theatlas.com Disposable Income Per capita in U.S. Ulta Beauty has ~7% share of the $87B Beauty Product Market Source: tradingeconomics.com

  16. Retail Stores are performing Strongly

  17. Major Player & Key Ratios

  18. Compare With Sephora • focusing on a combination of their online and in-store experiences and promoting brand engagement through social, mobile and web platforms • Oversea business • help educate shoppers to make better purchasing decisions. • Besides, • bringing together prestige and general brand names • educate these brands on what strategy worked best • loyalty program

  19. Valuation

  20. Key Financial Factors ROIC = Net Operating Profit After Tax ÷ Invested Capital ROCE = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

  21. Financial Targets 2019 - 2021 • Earnings per share growth in the mid-to-high teens percentage range for FY2019- FY2021 • Comparable sales growth in the 5 to 7 percent range • Modest operating margin expansion each year • New investment in supply chain, digital innovation and guest experience offset by savings from a comprehensive, multi-year cost optimization, program, Efficiencies for Growth, targeting $150 to $200 million of savings.

  22. Modeling Assumptions as management guidance • FY18 capex of $375 million • Capex in the range of $400 million • Depreciation and amortization • Tax rate 24% • Share repurchases to contribute approximately 4 points of EPS growth annually

  23. Real Estate is a Core Competency for Ulta Beauty • Balanced, productive real estate portfolio • 1,163 stores in 50 states • 96% of stores are approximately 10,000 sq.ft.

  24. Opportunities to Improve Working Capital • SKU rationalization • Better inventory visibility and markdown tools • Supply chain network on common systems and operating model • Improve supply chain and store end-to-end operations (EFG) GOAL TO INCREASE INVENTORY TURNS BY ~50 BPS OVER THE NEXT 5 YEARS

  25. DCF Model

  26. Recommendation Current Price: 350.88 Target Price: 351.64 • The Price is highly Volatile • RSI Currently is close to 70 Put it on the watchlist and wait to enter at a cheaper position

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