Company Paper - Grade: B PDF

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Company paper Financial analysis of Ulta ...

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Randa Taher DUE: 6/11/2018 Financial Management Professor Eliot Sherman

Company Paper: Analyze the performance of the company you chose at the beginning of this semester. Is your expectation the same as it was when you chose it? The objective of the Company paper is to arrive at a recommendation whether the company is a good investment or not, based on your analysis of past, present, and expected future performance, as well as an assessment of the company’s commitment to good corporate governance.

I chose to analyze the performance of Ulta beauty, salon cosmetics and fragrance because I believed that the company was not only doing well but demonstrated room for growth. I made this assumption because their mass market approach to beauty products was innovative in the sense that it offered both luxury and affordable merchandise and has a great niche as a beauty superstore. I've analyzed the fourth quarter results for fiscal year 2017 and the first quarter result for fiscal year of 2018. Ulta beauty has had great results throughout the fiscal year of 2017 given that its comparable sales growth has risen by 11 percent. This refers to the revenue made by the retail location in the most recent accounting period in comparison to the other years. Comparable store sales is a good measure of the stores sales growth and revenue which in Ulta’s case has shown a significant growth. The fourth quarter of fiscal 2017 featured a 23% increase in net sales and the total revenue was around $249 million which was mostly due the increase in e-commerce and

salon sales which have increased 60% and 17% respectively. The opening expenses for new stores has decreased compared to last years quarter four results. In terms of profitability, the net income of the company is a good indicators of the its profitability because it takes into account the cost of production, taxes, interest and other expenses. Ulta’s net income for fiscal year 2017 quarter 4 has increase 48.5% to $208 million dollars which is significant compared to the $140 million it was in quarter four of fiscal year 2016. Another good indicator of profitability as well as its efficiency is the company's operating profit margin. This contrasts how much the company earns before interest and taxes to the amount it makes in sales. Ulta makes plans to decrease its operating profit margin because of an increase in overhead costs. In terms of the company’s financial statements, there are a variety of formula metrics that help us assess the profitability for shareholders. The company has an Return on investment (ROI) of 33% which means that the returns exceed costs and analysts can consider the investment a net gain. Return on asset ratio assesses how profitable a company is relative to its total asset and given that Ulta’s Return on Asset (ROA) is 21% the company manages their assets relatively well as is expected to have a high return. Earnings per share helps evaluate the return on investments and helps show the company's profitability per share. There has been a 65% increase in non-adjusted Earnings per share from the fourth of 2016 compared to the fourth quarter of 2017 from $2.24 to $3.40. The company's balance sheet also provides a comprehensive breakdown of the assets and liabilities which give an overview of the company’s overall financial health. I began by calculating the liquidity ratio which shows the firm's ability to pay off debts that are maturing within a year. The current ratio decreases from 2.90 to 2.6 on the balance sheet and the quick ratio decreased from 1.12 to 0.92 which might mean that the company is relying heavily on inventory or other assets to pay off its short-term liabilities. The next thing I analyzed was the

level of debt which can be due to the high interest expenses that can have a negative effect on the firm's earnings. Given that Ulta’s debt to equity ratio is less than 1% which relatively low compared to the industry standard of 130%. Then I measured the company’s asset management ratios like the inventory turnover rate which is stagnant at 3.3 from fiscal year 2016 for the fourth quarter and fiscal year 2017’s fourth quarter. The company's book value per share is similar to net worth which is assets minus debts and allows us to see what would happen if operations were to cease. For the last 12 months Ulta beauty’s average book values growth rate was 11.6 per year but for the last three years the book value growth rate was around 13.8%. This book value growth is promising in terms of the company’s financials. Ulta Beauty Inc. stock analysis is assed and based on the price earnings ratio which tells more about the company's future performance as well as its overall current situation. It helps investors decided how much they should pay for a stock based on its current earnings and as the price earnings ratio increase the current investors sentiment that the company is worth more. Ulta beauty has a price earnings ratio of 25 and a price to earnings growth of 1.2. This indicates that the market value per share is also rising and the high P/E ratio highlights positive future performance. In fiscal year 2018’s first quarter there is a net sales increase of around 17% which is comparing the $1,543.7 million in sales of the first quarter of 2018 compared to the $1,314.8 million in the first quarter of 2017. This growth can be due to the steady increase in ecommerce sales which has growth from $104. Million in 207 to $154 million in the first quarter of 2018 which is around a 48% increase. The general expenses as well as administrative and selling have increased 22.4% compared to the 21% of the first quarter of 2017 which was most likely due to the impact of investments in store labor and growth initiatives. There has also been a growth in pre-opening expenses from $4.2 million in the first quarter of 2017 to $5.2 million in the first

quarter of 2018. This is because there have been thirty four new stores and two remodels in 2018 compared to 2017’s first quarter of 18 new stores and one remodel. The net income also increased from 28% to $164 million compared to the first quarter of fiscal year 2017 which had a net income of $128 million. The merchandise inventories in fiscal 2018 increased by around $88 million. This increase in total inventory was caused by the opening of a hundred and seventeen stores since 2017 but the overall inventory per store decreased 3% compared to the first quarter of 2017. Ulta beauty is a has a beauty code that reflects the values of the company with on corporate governance illustrated by their 2016, campaign called Ulta Beauty Charitable Foundation. This was made to enhance the education and well-being of girls and women in communities across the country. In addition to this foundation the company also has a partnership with the Breast Cancer Research Foundation which reflects a commitment to corporate governance. Overall, I believe that Ulta beauty is a good investment based on its investments even though its stocks have dropped almost 20% in the past 12 months but their shares have been up 10%. This isn’t because of any missteps in the company’s financials or decisions but reflective of the growth of the beauty industry as a whole. The retail scene has become more competitive and departments stores have been discounting luxury makeup to compete with retailers such as Ulta and increase its traffic. Though Ulta faces these challenges, the financials the company has been delivering have great results with the most recent earning showcasing a net sales increase of 17% and net income increase of 28%. There was a significant weakness detected in Ulta’s usual most profitable category which was luxury cosmetics. The category lagged its competitors due to the discount approach of department stores competitors. Even though there was a lull in this

category, areas like skin care, salon, fragrance, and mass cosmetics were doing particularly well which helped pick up the slack from the luxury category.

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