Amazon-Proof Retail Stock: Ulta Beauty

Amazon.com (symbol AMZN) is projected to account for one-half of all internet-based U.S. retail sales by 2021, according to brokerage firm Needham & Co., up from about one-third of sales in 2016. The threat to competitors in the retail space has become so dire that a "Death by Amazon” index that tracks the stock prices of 54 retailers sits near a four-year low, according to research firm Bespoke Investment Group, which compiles the index.

Yet, there are a few big retailers that are finding ways to thrive despite the Amazon onslaught. Cosmetics chain Ulta Beauty (ULTA) is one of them. Here's why its stores and its stock should stand up to competition from Amazon. (Share prices, returns and other data are as of April 25.)

Yes, you can buy beauty products online. But you can’t get a haircut or manicure over the internet. Ulta’s winning formula is to sell both beauty goods and full-salon services at its 974 stores. Salon guests spend three times more than non-salon customers and shop two times more frequently, the company says. Ulta’s salon revenues are rising at a 20% annualized pace, more than double the industry growth rate.

Ulta’s expansion plans include opening more stores; it’s aiming for a long-term total of 1,400 to 1,700. The firm is also boosting its internet-based business. And it’s finding success with its loyalty program, which recently surpassed 21 million members, up from 9.4 million in 2011.

After climbing 34.1% in the past year, Ulta’s stock trades at a frothy 35 times estimated profits, more than double the P/E ratio of 16 for the SPDR S&P Retail ETF (XRT), an exchange-traded fund that holds a basket of retail stocks. But few retailers are expanding as fast as Ulta or look as well-protected from online competition. Sales climbed 23.7% in the 12-month period that ended in January 2017, compared with the previous year. Analysts expect revenues to hit $5.8 billion in fiscal 2018, up 19%. If the company can keep meeting or beating Wall Street estimates, the stock should continue its ascent.

Analysts at Bank of America Merrill Lynch agree. The investment firm recently upgraded the stock from a “neutral” to a “buy” rating. Strong online sales at Bestbuy.com should help lift revenues, the firm says, as will a greater focus on services with attractive profit margins, such as in-home advisers and extended warranties. A new generation of smartphones will also bring in more customers. Over the next 12 months, Merrill sees the shares hitting $58, a 12% return that could top 14% when you include the stock’s 2.6% dividend yield.

Ulta Beauty by the Numbers

• Share price: $277.99
• Market value: $17.3 billion
• Price-earnings ratio: 35
• Estimated 12-month profit growth: 23.2%

Check out five other retailers that can stand up to Amazon.