Shares of ( Ulta Beauty NASDAQ:ULTA) rose on Friday after the company reported fourth-quarter earnings, although so did most stocks after last Thursday’s historic rout. In the quarter, Ulta’s results came in slightly better than analysts anticipated for revenue, earnings per share, and comparable store sales.
Nevertheless, the outlook for the current year obviously matters more than the past. That goes not only for the impact of the coronavirus, but also the declining prestige makeup category, which had already begun decelerating last summer after a multi-year upcycle. That caused a precipitous fall in Ulta’s stock last September, from the high-$300 range all the way down to the mid-$200 range.
Even after Friday’s gains, Ulta shares sit just around $207 per share — not only well below the level where insiders made large buys last September, but just above the level where one director also bought big all the way back in 2017.
CEO Mary Dillon, Director Charles Heilbronn made big buys in September
When Ulta management shocked the market last September after its second-quarter report, shares plummeted from an all-time high of $368 to roughly $225. The growth stock superstar was seeing a deceleration in the core makeup category, which makes up roughly half of Ulta’s sales.
After the fall, two key insiders decided to show their confidence in Ulta’s business by buying a significant amount of stock. These were CEO Mary Dillon and Director Charles Heilbronn. Dillon bought about 1,300 shares, or $308,000, worth of stock at roughly $237 per share on Sept. 26. That seems like a lot, but it was a less than 1% increase in her holdings, due to her receiving shares as part of her executive compensation package. In total, Dillon owned about 105,800 shares after those purchases. Still, the discretionary purchase made a statement.
More confident was Heilbronn, an Ulta director and also a vice president at Chanel. After the September rout, Heilbronn purchased roughly 244,000 shares between prices of $235 and $245 per share, or around $58.7 million worth of stock, bringing his total number of shares owned to 2.02 million, worth around $420 million.
At current prices around $207, shares are now about 14% below where Heilbronn made that massive insider purchase.
And just above another Heilbronn purchase in 2017
This isn’t the first time Heilbronn has stepped in with a massive insider purchase. Back when Ulta had a previous growth scare in 2017, Heilbronn stepped in and bought a hefty 127,889 shares at prices in the $195 range. That wasn’t quite as big as last September’s purchase, but still amounted to a hefty $24.8 million.
Currently, the stock sits just above those levels.
Management may back up the truck on buybacks
Obviously in neither instance did Heilbronn or Dillon anticipate a pandemic possibly leading to a global recession. So, merely comparing today’s price to that of a few months ago doesn’t seem to be the right way to think about things.
Nevertheless, there may be some reason for optimism. On the conference call Thursday night, management guided to 7%-8% growth in 2020, with about 3%-4% comparable sales. However, management also believes operating margins will decrease by 70 to 80 basis points, which should mean operating income will remain roughly flat compared with 2019. In addition, this outlook did not incorporate a big slowdown from coronavirus.
What’s surprising is that apparently Ulta plans to load up on debt this year and buy back a huge amount of stock. Ulta’s board of directors just authorized $1.6 billion in repurchases, and management projects buying back $1.3 billion in 2020. Considering Ulta has no debt and made only $706 million in net income last year, that means taking on debt in order to execute the program.
On the conference call with analysts, management made clear they’d be taking out $1 billion from their revolver, and using both that and 2020 free cash flow to make the repurchases. It will also result in $9 million in interest expense this year, as opposed to $5 million in interest income last year.
That’s a bold strategy, considering we may be headed for a recession. Nevertheless, taking advantage of today’s low stock price could pay off big in the long run, should the effects of coronavirus only prove temporary. $1.3 billion in repurchases could retire over 10% of the company’s stock at these levels.
Cheaper than it’s ever been
At the current valuation of roughly 17 times earnings, Ulta is now trading at its lowest valuation than it has at any point over the past 10 years:
Management certainly thinks that means its time to load up on buybacks. While it may be a bit early for the company to do so, it could also be of tremendous value for shareholders over time, should earnings bounce back in 2021 and beyond.
Ulta has proved itself to have a pretty nice moat in the beauty category. Therefore, investors looking for both a relatively safe pick that also offers aggressive upside down the road should give Ulta a look. Just be cautious, because it’s hard to know where the stock may bottom out.