Ulta Beauty (ULTA)

By both methods, the value today (DCF $898 · Multiples $695) exceeds the market price ($567).

Today — fairly valued: at $567 trades ~18.3% below its value discounted to today (~$695); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — En valor: the target price ($866) plus dividends yield between the 4% floor and the 10% average return — a reasonable return, though without the margin of a great investment.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$431.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($567) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-4.1%/year) than we project (6.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$1.1 bn of owner earnings in year 5 (vs ~$1.8 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on Resultado operativo (EV/EBIT). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Year 0 is the TTM as of August 1, 2026 ($12.956bn of revenue, +11.2% year over year), taken as is: the second quarter carries no non-recurring items to normalize, and the TTM margins (12.46% operating, 9.34% net, 12.10% operating cash flow) sit practically where they already were in the prior window. Year 1 is anchored to the raised guidance from the August 27, 2026 release, read across its three anchors and projected over the rolling window. Fiscal 2026 net sales of +6.7% to +7.2% over the prior fiscal year's $12.393bn give $13.25bn; with the first half already realized at $6.200bn (+10.0%), the range implies a second half of $7.05bn, or +4.4%. That deceleration is not deterioration: starting in the third quarter the company anniversaries the Space NK acquisition, which is what separates the quarter's +8.9% consolidated growth from its +3.8% comparable sales. The window ending in August 2027 combines that second half with a first half of fiscal 2027 growing at the organic pace (~5%, comparables of 3% to 3.5% plus store openings), giving +4.7%. That is why the path is not monotonic but a one-year trough followed by recovery to the durable pace (the deceleration rule's rebound exception): +4.7% in year 1, +5.2% in year 2, and then a gentle decline toward +5.0% by year 5, which is the sustainable growth rate of a chain that grows through comparables and openings rather than acquisitions. Extrapolating the TTM's +11.2% would have capitalized the anniversary of a purchase as if it were business growth. Year 1's operating margin is anchored to the guidance's other anchor: operating income growth of +8.3% to +9.3% over fiscal 2025's $1.533bn gives $1.668bn, or ~12.6% over guided revenue, and from there it expands toward 13.28% by year 5 on operating leverage from the online marketplace and the retail media business. The net margin does not track it in year 1 and dips slightly to 9.30%: the diluted earnings-per-share guidance of $28.70 to $29.00 implies it, because the company drew $339.6M of short-term debt to sustain the buyback and that financing cost sits below the operating line. It recovers toward 9.75% by year 5 as scale absorbs the interest. The share count path is a single one across all three scenarios and comes from revealed behavior: 43.062M diluted in the second quarter versus 45.112M a year earlier, a 4.5% annual net reduction, modeled at 4.0% out of prudence. The company repurchased $791.1M in the first half and stated it expects to exhaust the $1.0 billion remaining under the $3.0 billion program before the end of the fiscal year; that corroborates the rate but does not set it. Capacity is not a constraint either: with no dividend, the $1.15bn of free cash flow over a $23.2bn market value gives nearly 5% annually. The base case's exit multiple is 13.9 times operating income, at the enterprise level and within the 12-17× specialty-retail band, supported by a return on invested capital of ~44% —well above the 10% bar— and a terminal growth rate of 5.0%. The adverse case stresses year 1 well below what guidance implies and compresses the operating margin; the favorable case assumes the online marketplace, the retail media business, and the international expansion scale faster.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $866 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $567, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $866 in 5 years and a required return of 4.5% annually, the maximum to pay today is $695. Against the current market price ($567), the margin of safety is 18.3% (trades below the maximum → there is margin) and the total return at that price would be 8.8% annually.

• Entry multiple. Trades at 15× operating income, against a 12-17× exit band for the specialty-retail archetype.
• Expected return (base case). +9% annually over 5 years, appreciation plus the buyback effect.
• Margin of safety. It trades close to intrinsic value, far from the required margin of safety.
• Exit multiple. 13.9× operating income of the terminal year, with cash and debt in the bridge.
• Sensitivity to the adverse scenario. The adverse scenario, anchored in the Target loss and competition, leaves a return close to zero.
• Decline in the stock. The stock fell, with the reported operating results not justifying the magnitude of the decline.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (110%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Return on capital. Well above the 10% bar, in the exceptional band, on invested capital reduced by efficient working capital.
• Cash generation. TTM operating cash flow of US$1,545 million, consistent and predictable relative to net income.
• Cash conversion. TTM operating cash flow exceeds TTM net income, with no signs of paper earnings.
• Capital intensity. TTM capex of US$414 million (~3.3% of sales), moderate for a retailer with a mature store base.
• Gross margin. Expanded 100 basis points in the first quarter of fiscal 2026 (40.1% vs 39.1%) on lower shrink and better merchandise margin.
• Stock-based compensation. SBC equivalent to ~0.3% of sales, immaterial relative to cash flow.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Ulta's central driver is same-store sales, broken down into average ticket (price and mix) and transactions (traffic), the same volume × price logic the method applies to retail. The second driver is the store base and recent international expansion (Space NK, Mexico, Middle East), which today carries less weight than same-store sales but explains the gap between total growth and same-store growth. The loyalty program is not a direct revenue driver, but it is the database that sustains average ticket and retention.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (01-ago-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Same-store sales. Recovery from +0.7% in fiscal 2024 to +5.4% in fiscal 2025 and +5.3% in the first quarter of fiscal 2026.
• U.S. store expansion. Stated potential of more than 1,800 stores versus the current 1,505; increasingly incremental growth room.
• International expansion. Space NK, the Mexico joint venture, and the Middle East franchise are new pieces that are still small.
• High-margin lines (UB Marketplace, UB Media). Launched in fiscal 2025, with early traction but still marginal contribution to the total.
• Raised guidance. The June 2, 2026 release raised operating income and earnings-per-share guidance for the current year.
• Loss of the Target channel. The end of the partnership in August 2026 removes more than 600 points of distribution.

• Business model. Specialty beauty retail with integrated salon services and a single reportable segment; growth relies on average ticket, transactions, and early international expansion.
• Demand recurrence. Beauty and personal care consumption is recurring, though discretionary and sensitive to the macroeconomic cycle.
• Assortment differentiation. Coverage of every price tier (luxury, mass, salon) under one roof, a positioning no competitor fully replicates.
• Barriers to entry. The 10-K itself acknowledges a highly competitive market with few barriers to entry.
• Omnichannel customer behavior. Omnichannel customers spend more than 3 times what single-channel customers spend; 73% of members transact only in store.
• Reliance on partner brands. The top ten brands account for ~51% of sales, with no long-term supply contracts.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net cash $0 bn
• –Interest coverage (EBIT / interest)no data
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 110% of ROIC
• ✓Value creation (ROIC − 10% bar)+34pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 1.3x
• ✓Float / working capitalFrees up cash $0 bn (float / negative WC)
• ✓Dilution (SBC % of revenue + shares)SBC 0.3% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Debt. Only short-term debt (~US$145 million); no long-term debt outstanding on the recent balance sheet.
• Cash. Cash and equivalents of US$166 million plus US$55 million of short-term investments, after funding buybacks and Space NK.
• Current liquidity. Current assets of US$3,022 million against current liabilities of US$2,304 million.
• Operating leverage (leases). Operating lease liabilities of ~US$2,158 million, characteristic of the leased-store model.
• Interest coverage. Positive net interest (more interest income than expense) from the net cash position.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• CEO track record. Kecia Steelman spent more than a decade at the company before becoming CEO in January 2025.
• Director ownership. Low director and officer group ownership (~0.2%), with no founder or controlling shareholder.
• Capital allocation. 100% of capital return via buybacks since 2013, funded by operating cash and not by debt.
• M&A discipline. The Space NK acquisition is the only relevant recent transaction, modest in size relative to the balance sheet.

• The end of the in-store partnership with Target (announced August 2025, expiring August 2026) removed more than 600 points of distribution and triggered a negative market reaction beyond the channel's actual weight in total sales.
• The market is discounting a normalization of growth after the fiscal 2025 same-store sales peak (+5.4%), fearing a repeat of the fiscal 2024 stall (+0.7%).
• The stock fell despite the June 2, 2026 release showing same-store sales of +5.3%, earnings per share up +15.5%, and raised guidance — a price reaction that does not track the reported operating improvement.

There is no operating collapse behind the decline: first-quarter fiscal 2026 results beat and the company raised earnings guidance. The gap between perception and results suggests motivated sellers reacting to the noise of the Target loss and fear of a structural slowdown, rather than a deteriorating business.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at +1%/year (+4% total): the margin of safety protects the downside. The bull (+15%/year, +99% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Macroeconomic conditions. Inflation, rates, and tariffs could reduce discretionary beauty spending; the company expects continued inflationary pressure in 2026.
• Structural competition. A market with few barriers to entry, against players with greater financial and marketing resources.
• Reliance on partner brands. No long-term supply contracts; the top ten account for ~51% of sales.
• End of the Target partnership. Expires in August 2026, eliminating more than 600 points of distribution and customer acquisition.
• Shrink and inventory. Shrink levels above historical norms, including organized retail crime, impacting margin.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A narrow moat and ROIC 44% above the 10% bar, but the margin is limited (+18%) → excellent business at a fair price.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 6% at a multiple/growth of 2.5 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 7% (EBIT/EV) + ROIC 44% → brushes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -4% vs our 6%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor +1%/yr, bull-scenario ceiling +15%/yr over 5y → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A narrow moat, stable; sources: cost advantage, efficient scale, intangibles, switching costs → partially passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -4%, within what we project (6%) — the story squares with the numbers.