Beautiful Investments

In the contemporary landscape of retail, the beauty industry stands as a formidable segment of the retail industry. The beauty market, valued at approximately $580 billion in the U.S., has shown resilience and growth even in the face of global challenges, surging by 14% from 2018 to 2023.

This industry’s profitability stems not just from the diverse range of products it offers, but also from its deep understanding of consumer behavior and preferences, as well as its alignment with evolving consumer values.

Central to this narrative is the rising influence of a health-conscious demographic, for whom the boundaries between wellness and beauty are increasingly intertwined. In an era where personal presentation interlaces with digital identity, the beauty industry emerges as a dynamic and vital sector, blending adaptivity and innovation.

At its core, the beauty industry thrives on the universal human desire to feel and look good, a sentiment that transcends economic cycles. In times of prosperity, beauty products serve as symbols of luxury and self-indulgence. Conversely, in less favorable economic conditions, they become affordable luxuries, small but significant purchases that offer emotional uplift and a sense of normalcy. This unique positioning of the beauty industry makes it resilient and adaptable, poised to grow and evolve with changing consumer behaviors and economic climates.

In conclusion, the beauty industry’s trajectory points towards sustained long-term growth, buoyed by more than just economic factors, but also continually tapping into the timeless human pursuit of beauty and well-being.

We will present a leading company in this industry, but first, let’s delve into a short update on the economy and markets, and the Smart Investor calendar.


Economy and Markets: Looking Forward

There are several important reports scheduled to be published in the next few days.

  • Later today, the Bureau of Labor Statistics will release October’s Producer Price Index (PPI) report, which reflects input prices for producers and manufacturers. Since PPI measures the costs of producing consumer goods, which directly affects retail pricing, PPI is seen as a good pre-indicator of inflationary pressures, i.e., a leading indicator for the next month’s CPI. Thus, the PPI serves the policymakers in shaping their overall inflation outlook.
  • Also today, the U.S. Census Bureau will publish October’s Retail Sales report, which provides information on how much money consumers are spending on various durable and non-durable goods. Since the report tracks the amount of spending in an economy, it helps to gauge the economy’s health and consumer spending habits, as well as the level of the buy-side inflation pressures.
  • On Thursday, the Federal Reserve will release October’s Industrial Production report, which shows the volume of production of U.S. industries like manufacturing, mining, and utilities. Although industrial production accounts for a smaller portion of economic activity than services, its sensitivity to consumer demand and interest rates makes it a leading indicator of GDP growth and economic performance.


As for the stock calendar, the Q3 2023 earnings season for Smart Investor Portfolio companies is winding down, with only Applied Materials (AMAT) scheduled to report this week.


The ex-dividend date for Applied Materials (AMAT) and CDW (CDW) is November 22nd.


Today, we are adding the stock of the largest specialized beauty retailer in the U.S., featuring stellar finances and profitability, which is projected to continue thriving in the years to come.

To make room for this valuable addition, we are letting go of one of the world’s largest food- and plant-processing companies, whose earnings have declined for two quarters, with little prospect of rebounding in the next year.


New Addition: Ulta Beauty (ULTA)

Ulta Beauty, Inc. is the largest specialized beauty retailer in the U.S. The company operates a popular beauty store chain, offering a mix of premium and mass-market brands through both physical stores and an online presence. Ulta Beauty carries a wide range of products, including cosmetics, fragrances, nail products, bath and body products, beauty tools, and haircare products. It offers a broad assortment of branded and private-label beauty products. Each store also has a beauty salon, which offers hair, skin, makeup, brow, and nail treatments and services.

Ulta was founded in 1990, launching in five locations in Chicago as Ulta3, a retailer offering beauty products at different price levels that immediately gained popularity. The company was renamed “Ulta Beauty” in 1999 and became publicly traded on NASDAQ in October 2007.

Apart from its broad range of products at different price levels, the company’s successful expansion was supported by its smart business strategy; the company was amongst the first retailers to employ digital marketing to build a customer base and increase sales. In 2014, the company underwent a business overhaul, repositioning itself from one of the many beauty retailers into a beauty powerhouse. Ulta became the ultimate beauty source, with no other company offering both mass and prestige cosmetics, as well as salon services, in the same spot. The comprehensive offerings, coupled with innovative marketing, helped Ulta to outpace its competitor Sephora in 2015 (in terms of number of stores and total sales) and capture a 27% share of the U.S. beauty market in the same year.

Today, Ulta Beauty commands a market capitalization of $19.2 billion and has reported sales of almost $11 billion in 2022. The company runs more than 1,350 brick-and-mortar stores across 50 states, along with offering its products through its website, and has a workforce of almost 40,000 employees. Ulta sells over 25,000 products, including private-label products and merchandise from more than 600 brands.

The company continues to grow its physical and online presence, harnessing the power of social media marketing, and encouraging customer engagement through special app features, valuable online content, and a best-in-class loyalty program that has more than 40 million active members. According to the company, members of the loyalty program account for about 95% of total sales. With an extremely large number of loyal customers, Ulta has one of the largest moats in the specialty beauty retail space.

In addition to its large chain of stores, Ulta partners with other retailers to promote sales and brand penetration. In 2020, it partnered with Target (TGT), launching sales of Ulta products in more than 100 Target stores, as well as on the Target website. Within its online activity, Ulta partners with Alphabet (GOOGL), whose cloud services power the machine-learning algorithms behind Ulta’s comprehensive digital shopping experience. It also partners with Haut.AI, which specializes in AI research for skincare and longevity.

The company has been growing organically, as well as through acquisitions. Within the latter, Ulta has focused on tech businesses, supporting its innovative digital presence strategy. Thus, in 2018 Ulta bought QM Scientific, an artificial intelligence (AI) technology company, and GlamST, an augmented reality (AR) technology company. These acquisitions helped Ulta build its AI and AR capabilities, supporting sales personalization and improving the online sales experience. In addition, in 2018, Ulta made two significant investments: in digital workflow company Iterate, and an online booking tool Spruce. In 2021, Ulta invested in Adeptmind, an AI retail technology company creating advanced digital discovery solutions for retailers and shopping centers.

Following the success of its investments, in 2021 the company joined the Venture Capital (VC) field with the launch of Prisma Ventures, a $20 million VC fund focused on digital innovation in beauty. The VC fund focuses on early-stage startups in the areas of personalized and data-driven technology, AR, VR, the metaverse, technology-powered custom beauty products and in-store services, and social commerce.

The beauty industry is the fastest-growing niche of the retail market, surging 14% from 2018 to 2023 despite the Covid-19 pandemic’s hit to sales across the industry. Today, the U.S. beauty market is valued at around $580 billion and is expected to continue its fast growth due to several secular trends, including the growing prevalence of beauty-aware younger shoppers and the increasing influence of social media. Riding these trends, Ulta has gained a considerable competitive advantage over its sole competitor, Sephora, which only offers high-end brands and has a lower online presence. In addition, Ulta has a far larger store network and foot traffic. Thus, Ulta Beauty serves almost a quarter of all adult women in the U.S., commanding 39% of the specialty beauty retail market.

While the beauty industry isn’t insulated from the economic downturns, Ulta is well-positioned to continue growing even in times when consumers become much more price sensitive. First of all, it is supported by its enthusiastic and loyal customer base. Second, the personalized online experience helps its customers choose products wisely within their budget. Third, shoppers who are forced to trade down, can find products of all price ranges in the same Ulta store, and continue to be the retailer’s customers even during hard times, as opposed to stores offering only luxury brands.

These advantages came to light in August, when Ulta reported fiscal Q2 2023 (ended July 29, 2023) results. At a time when many other retailers complained about the adverse effects of inflation and weakening consumer sentiment on sales, Ulta’s comparable store sales increased by 8% year-on-year, and net sales jumped 10.5%, while gross profit increased 7% versus the same quarter of 2022. Revenue and earnings results defied analysts’ expectations by a wide margin.

In fact, Ulta’s EPS results have always surpassed analysts’ estimates, with the sole exception in Q1 2020, with the onset of the pandemic restrictions. In FQ2, EPS rose 5.8% year-on-year, after rising 9.6% in the previous quarter. While the second quarter’s results were weaker than those of fiscal Q1 due to higher input and labor costs, the difference wasn’t large, as negative factors were offset by strong revenue growth and cost-efficiency measures. The company finished the quarter with $389 million in cash and cash equivalents.

Overall, Ulta reported a blockbuster fiscal first half of the year, despite margin compression due to inflation. In FH1, all categories registered strong sales growth, while the company increased the number of loyalty members, and strengthened engagement with the Ulta Beauty brand. As a result, the management upgraded its earnings guidance for fiscal year 2023 for a second time this year, lifting net sales guidance by ~5% and EPS guidance by ~6% from the already upgraded outlook published after the fiscal first quarter results.

In fact, Ulta Beauty has consistently posted strong financial results over the years. In the past three years, Ulta has grown its revenue at a CAGR of 19%, while its earnings surged at a CAGR of 71%. The consistent earnings growth has allowed the company to expand its business and invest in innovative initiatives and partnerships. It has also supported the company’s robust financial health, which compares exceptionally well with other large retailers.

Ulta has zero debt, financing its organic and inorganic expansion solely from its income from operations; it is a cash-generating machine whose FCF has grown at a CAGR of 30% in the past decade. As for capital efficiency, Ulta features industry-beating, if not market-beating, metrics. Its Return on Equity (ROE) of 66%, Return on Assets (ROA) of 24%, and Return on Invested Capital (ROIC) of 33% are multiples of the industry’s averages. The company’s robust profitability is reflected in its operating margin of 15.3%, and net profit margin of 12%, which are much higher than the averages in the Consumer Discretionary sector.

The company’s efficiency and robust cash-generating abilities sustain its aggressive “cannibalization” of its stock outstanding, underscoring the management’s shareholder-friendly priorities. The company has been scooping up its shares since 2014, reducing its share count by 22% in that period. During the fiscal H1 2023, Ulta made share repurchases for the amount of $560 million, with the additional $540 million remaining available under its current $2 billion buyback program, running since March 2022.

Given the company’s stellar finances, robust delivery, and strong alignment with shareholder interest, its weak stock performance this year is quite surprising, and can only be explained by low investor sentiment towards Consumer Discretionary stocks, apart from the sector’s giants like (AMZN) and Tesla (TSLA). The discretionary retailers’ stocks have been under pressure due to inflationary headwinds and concerns about the interest rate increases on consumers.

Ulta’s stock gained 53% in the past three years but has declined 5% in the past 12 months, underperforming the broad market. It reached an all-time high in April this year, declining strongly from the peak on profit-taking amid a choppy market. Underscoring the market’s punishing stance towards consumer cyclicals this year, most of the retailers in the sphere have seen their stocks tumble by the double digits.

However, with the inflation rate heading down and the rate-hiking cycle coming to an end, these challenges are expected to decrease going forward, with the strongest rebound expected at quality companies, demonstrating business expansion and earnings growth prospects. In fact, Ulta’s stock has been trading upwards since the end of October. Still, after this year’s decline, it is now trading at modest valuations, considering its strong finances and earnings growth: its TTM P/E of 15.6 and a Forward P/E of 15.3 are in the mid-range of comparable companies in the industry, and low compared to Ulta’s historical averages.

TipRanks-scored top Wall Street analysts see an average upside of 33.5% for Ulta Beauty’s stock in the next 12 months. ULTA carries a TipRanks Smart Score rating of “Perfect 10” with a “Moderate Buy” recommendation:

Given all of the above, we view Ulta Beauty, Inc.’s stock as a winning combination of quality and growth, and as such, a valuable addition to the Smart Investor portfolio.


New Deletion: Archer Daniels Midland (ADM)

The Archer-Daniels-Midland Company is an American multinational food processing and commodities trading corporation. The company operates more than 270 plants and 420 crop procurement facilities worldwide, wherein cereal grains and oilseeds are processed into products used in food, beverage, nutraceutical, industrial, and animal feed markets worldwide. The company also provides agricultural storage and transportation services through its subsidiaries.

ADM is a Fortune 500 company, active in more than 200 countries; it is one of the largest companies in the global food industry. It is a robust and profitable corporation with a stellar balance sheet. However, in the past two quarters, the company has been plagued by several issues and developments, weighing on its stock performance.

While ADM has always surpassed analysts’ earnings expectations, in the past two quarters investors have seen year-on-year declines in earnings-per-share, as well as declining operating income, falling net profit margins, and much lower free cash flows.

These setbacks will be short-lived, according to the management who even lifted the company’s full-year EPS outlook, albeit marginally. Still, they strongly weighed on sentiment toward the stock, which was already hampered by other unexpected occurrences.

Unfortunately, in September, there were a fire and explosion at ADM’s soybean processing facility in Decatur, Illinois, which injured eight employees. This was the second such occurrence at the same facility, and the company was forced to temporarily shut down the plant, resulting in unplanned downtime and inventory adjustment. In another negative news, ADM retracted its plans to invest $300 million to expand its protein processing facility at the same location, due to tumbling demand for plant-based meat. According to the company, the plant-based protein market’s weakness is expected to persist in 2024, hurting ADM’s specialty ingredients operating profit.

While ADM’s long-term prospects continue to be strong, the short- to medium-term ones are less optimism-inducing. Currently, analysts project negative revenue and earnings growth for the next two years. While TipRanks-scored top Wall Street analysts still rate it a “Moderate Buy,” they have been lowering their price targets for the stock in the past two months. Given these facts, we believe that it will be difficult for the stock to recover its 12-month loss of 22% in the near term. Thus, we see it appropriate to sell the stock.


Charter Members of the 30% Winners Club

*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.

The markets have delivered another strong performance in the past week, and our exclusive club’s ranks have expanded again, welcoming the last of the three members it lost during the market turbulence at the end of October.

The Winners Club again includes six stocks: GE, AVGO, ANET, ORCL, CDW, and now also TECK with a gain of 31.7% since purchase.

Now, the first in line to enter the ranks of the Winners is Molina Healthcare (MOH), but with a gain of 21.9% since purchase, it has a lot of ground to cover. Will it be able to close the gap, or will someone else outrun it to the finish line?


What’s Next?

Our next commentary will come out on Wednesday, November 22nd , before the market opens.

Until then – we wish you a world of investment success!

Access the full Smart Investor Archive, including all historical stock picks and original newsletters.


Portfolio Changes

New Portfolio Additions

Ticker Date Added Current Price
ULTA Nov 15, 23 $397.93

New Portfolio Deletions

Ticker Date Added Current Price % Change
ADM May 10, 23 $73.86 -1.05%

Current Portfolio Holdings

Ticker Date Added Current Price % Change
GE Jul 27, 22 $117.25 +109.82%
AVGO Mar 22, 23 $972.96 +54.21%
ORCL Dec 21, 22 $116.10 +42.45%
ANET Jun 21, 23 $215.20 +42.04%
CDW Jun 29, 22 $218.46 +38.20%
TECK Dec 8, 21 $36.63 +31.67%
GD Dec 22, 21 $247.86 +21.64%
MOH May 3, 23 $362.87 +21.15%
JBL Jul 5, 23 $131.88 +20.78%
AMAT May 31, 23 $154.08 +15.59%
SMCI Nov 8, 23 $293.87 +15.06%
ITT Oct 18, 23 $106.99 +12.02%
CHKP Jul 19, 23 $142.00 +11.53%
STLA Sep 6, 23 $20.25 +11.51%
UNH Apr 19, 23 $540.46 +11.16%
WCC Sep 14, 22 $148.67 +10.82%
CI Jul 12, 23 $290.08 +7.96%
PH Oct 11, 23 $427.96 +7.58%
VRTX Aug 2, 23 $369.95 +6.39%
TSM Aug 23, 23 $98.91 +5.46%
EME Nov 1, 23 $217.59 +5.44%
EG Oct 4, 23 $393.16 +5.35%
ACN Aug 16, 23 $320.49 +4.18%
CXT Oct 25, 23 $53.30 +2.98%
APH Aug 9, 23 $88.71 +0.31%
STM Sep 13, 23 $43.74 -0.97%
TDY Aug 30, 23 $393.46 -5.47%
APD Apr 26, 23 $268.41 -6.05%
DE:IFX Apr 5, 23 $32.79 -7.61%
PERI May 17, 23 $28.47 -8.93%
LW Apr 13, 23 $95.88 -11.36%
TEX Sep 20, 23 $51.36 -11.93%
ACLS Sep 27, 23 $137.64 -12.38%



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