The Greek philosopher Socrates once said something to the effect of “all I know is that I know nothing.” That phrase has summed up my feelings lately as I’ve been analyzing certain stocks.

As investors we take pride in digging into companies, understanding their business, and coming up with some master thesis as to why they’re worth putting our money into or not. But I learned something about myself when I started analyzing Lululemon (LULU) a month or so ago. At the time, I also took a quick look at Ulta Beauty (ULTA) as well.

What I learned about myself was…I have no clue about how women shop.

*Classic painting “The Death of Socrates” or also “live shot of me researching ULTA”*

I mean yes…I had a general understanding of how women shop at Lululemon because it is a clothing brand after all. But ULTA was a complete mystery to me.

Are they their own brand of makeup or are they a retail store that sells other brands?
I’ve heard the name Sephora before. Is it like Sephora? Wait, what is Sephora?
Do you try on make up at the store? Or are people buying online?
Once you find “your brand” how often do you buy something new or experiment?

It was like this new world that I’d never been introduced to. I was like a baby deer trying to walk for the first time. An old awkward looking baby deer with a scraggly beard, but a baby deer nonetheless.

Finally I realized that I was about 20 feet away from my greatest possible resource - my wife and daughter.

I asked and they schooled me about ULTA and helped me understand how they shopped for makeup. My daughter doesn’t really shop for makeup yet, but she’s a middle schooler with internet access…so in other words she knows about everything.

*My daughter talking about things she’s learned about online*

With that background though, I could finally get into my stock analysis process. Here are some interesting things I saw about ULTA:

They’ve had almost 10 years of uninterrupted revenue growth, the one down year was the pandemic year.

Their recent revenue growth has slowed a bit from their 5 year averages, but still respectable given the current economic environment.

Their margins seem good for their industry (which is retail, more on this in a minute) and they’re trading at significantly lower price multiples than they have in the past.

And we just take a quick look at their price chart, we can see that Ulta’s down around 33% from their high in March 2024.

*Close to the 52 week low, that means it’s a buy right? Well…*

So what’s going on here? To me, Ulta trending down has mainly to do with a few things:

They announced a weaker than expected 2024 outlook
Earnings are likely to be flat or negative for 2024, and were guided down last quarter
Revenue growth is slowing

One of the reasons we can’t just look at revenue growth is because it only tells us one part of the story. Looking at the revenue chart above shows consistent revenue growth, but it doesn’t tell you what’s happening with costs.

Over the last 2 quarters, Ulta has been struggling with higher costs. Cost of revenues and SG&A both grew at a faster rate than revenues last year. Plus the company has had to do more discounting and promotions over the last 2 quarters to keep the sales traffic up.

So while revenue is up, they’re less profitable with economic headwinds increasing the amount of uncertainty in their business.

So is ULTA a buy or not?

It depends. Do you believe ULTA’s organic growth is going to come to back? Obviously the longer they run sales and discount merchandise to bring customers in, the longer margins and earnings will be impacted.

But there are elements of their business that are very positive. First of all, the products that they sell are extremely sticky. Here’s a breakdown of their revenue categories from their most recent 10-K.

No one is just going to stop buying beauty products, it’s too engrained into our every day lives. But there is a lot of retail competition from high end stores (Sephora), general retail stores (Walmart, HEB), convenience stores (CVS, Walgreens), as well as e-commerce giants (Amazon).

So there’s no question people will be buying these products, the question you have to answer as an investor is if you think they will continue buying them from ULTA enough to provide acceptable growth or not.

In general, I think ULTA is a good business that is attractively priced. Their combination of national name brand and premium / specialty products mixed with their footprint makes them different enough and convenient enough to keep growing IMO.

But ultimately they weren’t for me.

Why I Didn’t Buy ULTA

When I was researching ULTA, I was also researching Lululemon (LULU). Now, I had LULU on my watchlist from last year so I was already familiar with the company. But while I was looking at both companies, I did a quick comparison to see which one I was going to move forward with. Here’s what I saw (I’ve updated it with current numbers though):

For me LULU was a better fit, because valuation isn’t a primary consideration for me. While ULTA was technically trading at better value levels, LULU’s growth outlook and overall profitability look better. I also understand LULU’s business better, and personally think their brand and moat is stronger.

The flip side is that LULU likely comes with a little more risk. Fashion trends tend to be more volatile than core beauty products. ULTA is in a better position to deal with changing trends since they sell a combination of their own products and other brands. LULU on the other hand is selling their own styles only.

But this is why investing in individual stocks is truly a personal exercise. You could make a case for both stocks, depending on what you’re looking for and what you value most. The key is digging in and figuring out what those criteria are for you.

Just make sure you start with knowing that you know nothing. 🙂

Quick Thoughts

If you watched my “price targets” video this probably won’t be a surprise, but I’m retiring my spreadsheets that I used to use. They weren’t very reliable with the Finviz data pull changing all the time, and I’ve stopped using them personally. If you get value from them, obviously you can still use them, but I won’t be doing updates anymore. Let me know if you have questions.
Yes, I watched part of Roaring Kitty’s live stream. Not because I think people should invest in GameStop, but it’s just an interesting story. More on this soon.
A few of you brought up Joseph Carlson’s video on LULU, I watched it as well. Ultimately, I just think LULU’s core customer values the brand the way that premium fashion brands are valued by their customers. Only time will tell what point of view turns out to be correct.
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Have a wonderful week, and I’ll see you next Sunday!

Portfolio Updates for the Week

No updates this week. I’ve really been relaxing after a busy first five months. 😀

ULTA, LULU, and learning that I know nothing

Quick Thoughts

Portfolio Updates for the Week

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ULTA, LULU, and learning that I know nothing

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Good investing is like good parenting

This is why most people should be investing in stocks