Source: Qingzhao
Author: Li Pianpian

One week ago, on August 14th, Berkshire Hathaway, led by Buffett (referred to as "Berkshire Hathaway"), announced its 13-F position report.

Investors have discovered, $Berkshire Hathaway-A (BRK.A.US)$ / $Berkshire Hathaway-B (BRK.B.US)$ quietly took a position in a beauty retailer. $Ulta Beauty (ULTA.US)$ 0.6901 million shares of stock, which is worth approximately $0.266 billion (approximately RMB 1.909 billion), making it the twentieth largest shareholder of Ulta Beauty.

While selling Apple on the front foot, and unobtrusively buying into the "lipstick effect", as Chinese investors, how to copy the latest work of the stock god?

What is Ulta Beauty?

When it comes to beauty retailers, many people may first think of Sephora. However, in the US market, Ulta Beauty is the largest cosmetic retail company.

In 2023, with revenue of $11.2 billion, Ulta Beauty occupies 9% of the US market share, surpassing Sephora (with revenue of approximately $8 billion in the US region), making it the company with the highest market share in the cosmetic retail industry.

As of February 2024, Ulta Beauty has 43.3 million members across the US, even more than the 30.4 million members of the local Starbucks.

In 1990, Terry Hanson and Dick George, who worked at the large US chain drugstore Osco Drug, quit their jobs and established this beauty conglomerate in Illinois, the Midwest of the US.

Unlike the market practice of mainstream brands entering supermarkets and high-end brands entering department stores, Ulta Beauty emphasizes 'All Things Beauty, All in One Place', providing consumers with a combination of high-end and low-end perfumes, cosmetics, and salon services.

The starting point for Ulta Beauty's choice to provide all beauty products in a one-stop shop is based on the development judgement of the American beauty market.

Founder Dick George, who has years of experience in the retail market, believes that American consumers are becoming more clear about their shopping budgets and what they want and don't want. Therefore, meeting the demand for one-stop shopping and providing a collection store that combines high-end and mainstream products with more variety and SKUs will be welcomed.

To control costs, Ulta Beauty focuses all of its budget on a wide range of product SKUs.

At that time, Ulta stores sold over 20,000 cosmetics, perfumes, and hair care products, and to enhance customer loyalty, Ulta stores are equipped with salon services for hair and nail care.

To accommodate these products and services, Ulta stores have a floor area of up to 1,000 square meters (with an average of about 88 square meters per store dedicated to salon services). In order to save costs, early Ulta stores were mainly located in the suburbs, and it was not until the end of 2016 that Ulta opened its first store in Manhattan, New York.

In addition, based on judgments of consumer shopping preferences, Ulta reduced spending on beauty advisors (BAs) and adopted open shelving for convenient viewing and access by consumers. They only hired 13 employees and 9 clerks to maintain store operations.

As evidence shows, Ulta Beauty's judgment of the market was correct, and Ulta has become increasingly popular.

After five years of establishment, Ulta Beauty has expanded to more than 20 stores, with the number of employees increasing from 22 to 800; after eight years of establishment, Ulta has opened 140 stores across the United States.

In the 18 years since its initial public listing in 2007, Ulta's revenue has grown from less than $0.8 billion to $11.2 billion in 2023 (makeup 42%/skincare 19%/hair 19%/fragrance 15%/services 3%), with a compound annual growth rate of 18%.

As of February 2024, Ulta has opened 1,385 stores in 50 states across the United States, with a total store size of 1,451,559.3 square meters. The average size of each store is 1,048.1 square meters.

In these stores, Ulta Beauty offers about 600 beauty brands and 25,000 products, covering almost all popular brands and items on the market:

Ulta provides both high-end brands such as Chanel, Dior, Estée Lauder, Lancôme, as well as mass-market beauty brands such as E.l.f. Beauty, Ordinary, MAC, Fenty Beauty, and has exclusive distribution rights for popular online brand Kylie Cosmetics.

Currently, Ulta has 43.3 million members, surpassing Sephora's Beauty Insider with 34 million members; with a 9% market share in the US market, Ulta also surpasses Sephora's 6% market share, making it the largest beauty retailer in the United States.

Repair-type cosmetic retailer in the 02 cycle.

In 2007, Ulta Beauty went public on the Nasdaq, and its stock price reached a high of $575 per share in February of this year.

In March of this year, Ulta Beauty announced its annual earnings guidance. Based on management's judgment of a slowdown in the global cosmetics market, it lowered its annual revenue growth rate to 3%-4%, with projected annual revenue of $11.5 billion, which is lower than the market's expected growth rate of 5%.

Since then, Ulta's stock price has continued to decline, falling more than 30% from its peak. This sharp decline has brought Ulta Beauty's valuation to its lowest level in nearly three years, with a P/E ratio of less than 14 times, approaching Nordstrom's P/E ratio during a period of declining market share. It is at this time that Buffett chose to make a move and hold positions with an average cost of $385 per share.

From the perspective of valuation, Ulta Beauty precisely meets Warren Buffett's aesthetic of "buying excellent companies at reasonable prices".

In 2023, Ulta Beauty's revenue was $11.2 billion, with a year-on-year growth rate of 9.78%, making it the second year in the 18 years since its listing that it achieved single-digit growth (the other being 2020 during the pandemic). However, overall, the performance of individual years has been mediocre and has not changed the overall growth momentum of Ulta Beauty.

On the one hand, based on the large amount of cash reserves and early remarks, Buffett does not seem to be optimistic about the U.S. economy. Taking history as a guide, Ulta Beauty, which emphasizes cost management, usually demonstrates excellent performance during economic downturns:

In the background of the general downturn in the U.S. retail industry after the 2008 financial crisis, Ulta Beauty was one of the earliest companies to regain vitality and grow against the trend. From 2006 to 2016, the number of Ulta Beauty stores expanded from 200 to nearly 1,000, an increase of nearly 5 times.

Among them, in 2008, while profit remained almost flat (only a 0.2% decrease), Ulta's sales increased by 19% year-on-year.

In 2015, Ulta surpassed Sephora for the first time to become the largest cosmetics retail chain in the United States, gradually taking up market share from Sephora and reaching up to 27% at one point.

After the epidemic, Ulta's growth once again demonstrated its resilience in overcoming the downturn in consumer spending. From 2021 to 2023, Ulta slowed down its store expansion, adding 44, 47, and 30 stores respectively. While the average transaction price remained unchanged, the same-store sales continued to grow, with growth rates of 37.9%, 15.6%, and 5.7% respectively, which is a testament to its popularity.

Fundamentally, Ulta's outstanding ability to negotiate with its supply chain supports its long-term deduction activities through its membership system:

At Ulta, members earn one point for every dollar spent, and these points can be redeemed for cash. 100 points can be redeemed for $3, 500 points can be redeemed for $17, and so on. The higher the membership level, the higher the redemption amount.

In addition, Ulta also offers close to half-price member discounts on clearance products from major brands on member activity days.

This gameplay has attracted a large number of low-income and young high-stickiness users for Ulta Beauty. Currently, Ulta has 43.3 million members, contributing over 95% of the company's sales.

In Ulta's user base, customers with an annual income of less than 0.025 million US dollars account for nearly 20%; the average age of users is 34 years old, almost 5 years younger than the average age of the total population in the USA.

On the other hand, at the current point in time, under the steady operation of Ulta Beauty's management, its healthy financial condition still has the conditions to cross the cycle:

The first quarter report of 2024 shows that Ulta had $0.525 billion in cash at the beginning of May, and institutions predict an expected free cash flow of $1.1 billion for the year, with a total cash flow of about $1.6 billion, exceeding the net income of $1.291 billion;

Combining Ulta's share repurchase plan (which has repurchased $0.2 billion and plans to repurchase $1 billion within the year), as well as market speculation that dividends may still be distributed within the year, and the fact that the company has no interest-bearing liabilities to be repaid in the near future, disposable cash flow is used for share buybacks and dividends.

Finally, in 2019, Ulta proposed a global expansion plan led by Canada, but due to the epidemic, it has been shelved to date. Currently, all of its stores and revenue are from the United States.

In the future, if Ulta replicates its success in the USA to Canada, China, and Southeast Asia, its valuation level may rise to a new level of imagination.

03 Looking for the Chinese version of Ulta Beauty

In addition to Ulta Beauty in the USA, cosme store in Japan and Don Quijote are all confirming a common development rule: when the supply chain region matures, offline beauty stores will become important in beauty retail.

The underlying logic is: the maturity of the supply chain supports the wave of industrial entrepreneurship, the frequency of brand updates gradually increases, and even the factory direct supply model is quietly emerging. In the diverse market, beauty stores with accurate selection as their core competitiveness will be favored by consumers due to lower decision-making costs.

Especially in China, the call for the peak of online traffic is increasing. Since the 618 Beauty Festival this year, the growth of online beauty retail sales repeatedly falls below expectations. Under the squeeze-out effect, offline beauty stores emphasizing scene experience regain room for imagination.

Under the big wave of online shopping in the past decade, offline beauty store formats have also undergone development and iteration.

From the 1.0 enlightenment period dominated by local chain cosmetic specialty stores (such as Jollan Jia Ren, Meile, etc.), to the 2.0 stage of international beauty brands entering China dominated by foreign chain specialty stores (such as Sephora, SASA, etc.); to the 3.0 new-style beauty gather stores emphasizing scene experience as the main focus.

This generation of gather stores has already taken on the initial form of Ulta Beauty's format.

For example, KK Group launched THE COLORIST in 2019, positioning it as a global makeup collection brand, offering consumers a total of 5500 SKU products including new Chinese trends, European and American styles, Japanese and Korean popular items, overseas trends, and Southeast Asian niche products. By October 2023, THE COLORIST has opened 216 stores worldwide.

Another example is Hua Mei, a warehousing beauty new retail brand founded in 2008, focusing on large-scale beauty experience stores. It has cooperated with over 400 brands, offering more than 9000 product SKUs covering cosmetics, skincare, fragrances, hair care, and small household appliances. By 2023, it has 14 stores nationwide.

Although these brands are still in the early stages of development, and even hesitate in difficult decisions about expansion and listing. The story of Ulta Beauty may provide inspiration and guidance to Chinese cosmetic retail enterprises.

Editor/Somer