Ulta Beauty (ULTA, Financial) is a beauty retailer that provides one-stop shopping for prestige, mass and salon products and salon services. The company focuses on providing affordable indulgence to customers by combining unmatched product breadth, value and convenience with the distinctive environment and experience of a specialty retailer. Industry peers include Regis Corp., Macy's Inc. and Sephora.
Short-term value
My short-term (three-to-six week hold) target price for the stock is $237.25, with an initial trailing stop at $245.17. Upward price movement will find no resistance. Downward price movement will find support at $242.90 and at $235.00, with final support at $227.10.
The Tax Act
The Tax Cuts and Jobs Act of 2017 makes broad and complex changes to the U.S. tax code, including, but not limited to:
- Reducing the U.S. federal corporate tax rate from 35% to 21%.
- Requiring companies to pay a one-time deemed repatriation transition tax on certain earnings of foreign subsidiaries.
- Generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries
- Requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations.
- Eliminating the corporate alternative minimum tax and changing how AMT credits can be realized.
- Capital expensing.
- Eliminating the deduction on U.S. manufacturing activities.
- Creating new limitations on deductible interest expense and executive compensation.
The Securities and Exchange Commission staff issued Staff Accounting Bulletin 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete.
To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
The act includes a transition rule to affect this participation exemption regime. As a result of the enacted legislation, taxpayers are required to include in taxable income for the tax year ending Dec. 31, 2017, the pro rata share of deferred income of each specified foreign corporation with respect to which the taxpayer is a U.S. shareholder.
It is important to note that income tax adjustments applied to repatriated earnings and deferred taxes, may distort a companies earnings and consequently its fair value.
In the case of Ulta Beauty Inc., it recorded a provisional estimated after-tax benefit of $38,287 during the fourth quarter of fiscal 2017 based on the re-measurement of net deferred tax liabilities and $9,778 due to the lower tax rate in January 2018. Given the significant complexity of the tax reform, the company will continue to evaluate and analyze the impact of this legislation.
The $38,287 estimate is provisional and based on the company’s initial analysis of the tax reform, and may be adjusted in future periods due to, among other things, additional analysis and additional guidance that may be issued by the U.S. Department of Treasury, the SEC and/or the Financial Accounting Standards Board.
Insider transactions
In the past 12 months, the company recorded 48 insider trades involving 385,359 shares of stock. Of those 48 insider trades, 31 were buys involving 264,794 shares of stock, and 17 were sells involving 120,565 shares of stock, creating an insider buy-to-sell ratio of 2.2 to 1.
Future value
My future (five-year hold) target price for the stock is $614, which is an average annual return of 29%. A prior five-year hold of the stock (2013 to 2018) would have returned an average of 25% per year. Past and future gains are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Any investment has the potential for loss, and past performance is no guarantee of future results.
Baseline and fair value
My baseline valuation for the stock is $81. Baseline valuations are based on free cash flow value, net current asset value, book value and tangible book value. My current fair value for the stock is $119. The fair value number is my current valuation for a stock based on earnings, earnings growth and the current five-year yield of a AAA-rated corporate bond. Value investing buy, sell and close targets are derivatives of fair value.
Fair warning
Fair warning means that the time for bidding has ended and an exchange is about to be concluded. For Ulta Beauty, fiscal year ended January 2018, is over valued. The stock is currently trading at levels above my most recent $191close target.
Disclosure
I hold no shares of Ulta Beauty Inc.
