Beauty Supply Throw Down: Sally Beauty Vs. Ulta

Prom season is in full swing, so it’s pretty timely that two beauty retailers are hot on the Throw Down radar. If you haven’t guessed it yet, I’m talking about Sally Beauty Supply and Ulta Fragrance & Cosmetics. These two have managed to stay shiny and healthy in a landscape with highly frazzled ends (read: retail) and have weathered the storm beautifully. So, my big question becomes: which one is the fairest of them all for investors?

In early May, Sally Beauty reported in-line second-quarter earnings, and a revenue beat. As of Sept. 30, 2015, Sally Beauty, which operates internationally under two lines: Sally Beauty Supply and Beauty Systems Group, numbered 3,655 Sally Beauty and 1,137 Beauty Systems Group company-operated stores. Sally Beauty reported that it opened or acquired 111 and 34 net new stores in Fiscal 2015.

Sally Beauty wrote in its 10k that it intended to spend between $125 million-$135 million excluding acquisitions in capital expenditures to fund the addition of new stores, store remodels and other improvements in fiscal 2016.

On May 26, competitor Ulta weighed in with better-than-expected first quarter earnings. As of Jan. 30, 2016, Ulta operated 874 retail stores in 48 states. Ulta sells over 20,000 products from 500 brands through its stores and online, and offers salon services at its retail shops. Ulta opened 103 stores in fiscal 2015, up from 100 in fiscal 2014. Longer-term, the company plans to operate more than 1,200 stores in the U.S.

In the aftermath, analysts were more bullish on Ulta than Sally Beauty, but before we get into that, it’s important to note that Ulta is the bigger company. Despite that, Sally Beauty is holding its own. However, shares of Sally Beauty are down nearly 8% for the year, while Ulta is up over 50%.

In an update on Ulta, analyst Kelly Halsor of Buckingham Research lifted the price target to $285 from $225 and reiterated a Buy rating. Halsor praised Ulta for its “best-in-class” loyalty program and noted that, unlike some retailers, Ulta isn’t feeling the same stresses related to seasonality or fashion:

“We believe Ulta can achieve at least a high-teens operating margin over time, above the company’s current goal for a mid-teens op margin, which translates into $14-plus in EPS by fiscal 2020 before considering Ulta’s pristine balance sheet ($5.83 per share net cash,no debt). We believe these factors justify awarding a higher multiple to Ulta shares (35 times beauty versus 30 times prior) particularly when considering the potential for further EPS beats this year.”

Oliver Chen and team of Cowen & Company rated Ulta Outperform and lifted the price target to $246 from $206.

“Ulta delivered significant upside to first-quarter EPS in a challenging retail environment,” wrote Chen and team, “a testament to both management’s execution and the overall strength of the beauty sector.”

However, Chen and team were not exactly negative on Sally Beauty. They reiterated an Outperform rating and $36 price target on the company.

“Investor focus on the Sally division up 2.3% comp and slowdown of loyalty card customer likely pressured shares,” wrote the team. “Cowen believes Beauty Club Card (BCC) weakness is a temporary and easily edited blip.”

Meanwhile, Halsor reiterated a Neutral rating and $34 price target in an update on Sally Beauty:

“While we previously viewed guidance as somewhat conservative and thought that the second-half of 2016 had the potential to beat plan, the company pointed to a number of investments that will negatively impact SG&A, making any upside dependent on comp,which we have very little visibility into today. At current levels, we believe the risk/reward is fairly balanced with 20% downside/20% upside.”

Finally, a quick check in with Rapid Ratings showed that both companies are in relatively decent financial health shape, with Ulta ahead of Sally Beauty (and gaining steam). On Jan. 30, Rapid Ratings gave Ulta a Financial Health Rating of 89, up one point from Jan. 31, 2015. Meanwhile, on March 31, the firm gave Sally Beauty a Financial Health Rating of 61, down five points from Sept. 30, 2015.

Overall, both companies appear to offer investors a thing of beauty.