Ulta Beauty, Inc. (ULTA) stock intrinsic value fair value estimate & owner earnings analysis

Ulta Beauty is the largest US beauty retailer, with 1,505 Ulta Beauty stores plus 86 Space NK luxury-beauty stores in the United Kingdom and Ireland (acquired July 2025), and a large online business. It sells cosmetics, skin care, hair care and fragrance across mass and prestige brands, runs a loyalty program and a co-branded credit card, and operates in-store salons. Its economics come from steady store openings (66, 67 and 33 in the last three years, each costing roughly $2.4 million all-in), repeat customers and disciplined inventory. How we measure earnings. We use owner earnings: cash from operations, less working-capital swings, less stock compensation (treated as a real cost), less the part of capital spending needed just to keep stores and systems running. Store rent is already an ordinary operating cost: the non-cash lease expense that is added back in the cash-flow statement is offset by lease payments, so we did not strip out lease payments as if they were working capital. Owner earnings were about $1.16 billion in fiscal 2021, $1.25 billion in 2022, $1.17 billion in 2023, $1.05 billion in 2024 and $1.06 billion in 2025 (roughly $23.6 per share in 2025). Fiscal 2025 owner earnings rose about 1% in total (about 6% per share thanks to buybacks) even though sales grew 9.7%, because store payroll, incentive pay and strategic investment pushed selling and administrative costs from 24.0% of sales in 2023 to 26.6% in 2025 and operating margin fell from 15.0% to 12.4%. We anchor on the median of fiscal 2023 to 2025, about $1.06 billion in total, or about $24 per share on the 43.5 million shares outstanding after buybacks. We excluded the 2020 COVID year, and treated fiscal 2021 and 2022 as boosted by post-lockdown demand and did not use them for the level. Recent quarters (first half of fiscal 2026 cash from operations and net income both above last year) are encouraging but are only two quarters and do not change the level. What we credit and what we leave out. Credited: new-store openings, which the company has funded from its own cash for many years at 60-plus a year, at a modest 2% a year in owner earnings (below the roughly 4% growth in store count, since new stores ramp up), fading to 1% by year 10. Left out: same-store sales gains, margin recovery, Space NK and Mexico expansion, and any benefit from share buybacks, because none of these is locked in. Fiscal 2025 comparable sales of 5.4% followed just 0.7% the year before, so they are not a dependable engine. A dated, known loss. Ulta and Target agreed in August 2025 not to renew the Ulta Beauty at Target shop-in-shop (over 600 Target stores) when it ends in August 2026. The filing does not say how large it is. We estimated it at roughly 3% of owner earnings in the base case and 6% in the bear case; this is our estimate, not a disclosed figure. Bear case (about $221 per share): the Target channel loss costs 6% of earnings, costs keep outrunning sales so margins compress by a further 15%, no growth is credited, and after year 10 earnings erode about 6% a year for 20 years. Debt is not a concern; borrowings were only $62 million at year-end. Base case (about $338 per share): earnings start near $1.03 billion (after the Target haircut), growing 0.9% in the first year (in line with last year's actual owner-earnings growth of 0.9%), then 2% a year from steady store openings, tapering to 1%, and then held flat for a further 15 years because the business has operated profitably for two decades except the 2020 shutdown; after that, nothing is credited. Bull case (about $428 per share): the Target loss is mostly offset by Ulta's own stores and online sales, store growth of 3.5% a year (the recent pace of 66 openings) tapers to 1.5% by year 10, and earnings hold flat for a further 25 years. Margin-of-safety price. The margin-of-safety price is near $165 per share, roughly 25% below the bear case, because the business is stable and unlevered but margins have been falling for two years and the size of the Target loss is unknown. What would make this wrong: a faster decline in store profitability than assumed; competitors taking share; or a Target loss larger than estimated. Unreconciled: the Target contribution is not disclosed; the second-quarter fiscal 2026 report was not read in detail.