Better Buy Now: Sally Beauty vs. Ulta
In all the recent takeover trash talk between Coty and Avon, one point got lost in the shouting: Selling makeup is still good business, even in these recessionary times. We've all heard about the "Lipstick Index" and how women keep buying makeup to refresh their look when they can't afford to buy a new wardrobe.
LVMH's Sephora chain has made hay in the U.S. market over the last decade by making shopping for makeup and toiletries a destination in itself. But it's the two pure-play superstores -- Sally Beauty Holdings (NYS: SBH) and Ulta Salon (NAS: ULTA) -- that control almost half the U.S. beauty-supply retail segment that are the real movers and shakers.
Both reported excellent quarters recently, drawing attention to their market. In addition, in May, Sally announced the offering of $700 million of senior notes, the proceeds of which will be used to pay down debt.
So if you want to play with the makeup merchants, whose stock would you choose?
First a few macro thoughts about the segment: Revenues for beauty-supply retailers have grown at a tame annualized rate of 0.4% over the past five years (mainly because sales in 2008 and 2009 were down as a result of the recession) but are set to take off in the next five years, according to IBISWorld's take on the segment.
The number of suppliers manufacturing products grew at an average annual rate of 1.2% over the past five years, which put more variety of products on the shelves, especially new lines for men and teens that are plumbing new markets, according to IBISWorld. And as the economy recovers, it's also forecasting that consumers will splurge on higher-priced items such as eco-friendly cosmetics.
Sally's hitting new highs, trading at about $28 per share and a P/E of almost 24, but it is still off its consensus target of $31 per share. A few insiders at CDR may be cashing out, but that hasn't cooled investors on the stock; it gets a five-star CAPS rating from the Fool community.
Same-store sales were up 9.1% in the latest quarter, which CEO Gary Winterhalter said came from both more store traffic and bigger sales per customer, both good news for future growth prospects. Management boosted its sales growth outlook for the full year to between 5% and 7% from 4% to 5%.
Ulta is also trading near its peak, at about $97 per share and a very rich P/E of almost 47, but it, too, is off its target of $106.50 per share. In its latest quarterly report, same-store sales were up 10.1% and operating margins improved by 200 basis points.
However, Fools give it only a three-star CAPS rating because some think the stock price is inflated (a reasonable fear at that P/E), the company is still trying to grow its loyalty program, and its many products are no different from what you find in other stores, which makes it vulnerable to price-cutting. Where they win, however, is the comprehensiveness of their offerings.
But you could say the same thing about Sally. So it comes down to what kind of investor you are.
Neither Sally nor Ulta pays dividends, but during Sally's recent analyst call, CFO Mark Flaherty said after paying down $100 million worth of debt, management is "actively having dialog" about shareholder-friendly uses for its free cash, "whether it be in the form of a share repurchase or dividend program." That and a lower P/E would tend to give Sally an edge among the more value-oriented investors.
Conversely, Ulta said it plans to step up its expansion plans, after doing a review that found there's more potential to open large stores around the United States. During the quarterly report earlier this month, CEO Chuck Rubin told analysts Ulta ended the quarter with 467 stores, but its analysis concluded that the U.S. market can handle up to 1,200 of its big boxes, better than the 1,000 stores it had initially forecasted. Rubin said 2012 plans are "locked in" and management is looking at sites for 2013 openings based on these new goals.
That would give a growth investor hope, but keep in mind that aggressive store opening schedules usually take their toll on SG&A and operational disruption. You may need calm nerves for this one.
If you're the slow-and-steady type, ride with Sally; and if you're the betting type and want growth, let it ride on Ulta. If neither looks good to you, try checking out this other retailer, The Motley Fool's Top Stock for 2012. Get a free copy of our report.
The article Better Buy Now: Sally Beauty vs. Ulta originally appeared on Fool.com.Fool contributor Mercedes Cardona owns no shares in any of the companies mentioned in this article. Follow her onTwitterand on herwebsite. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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