M c I n t i r e I n v e s t m e n t I n s t i t u t e

McIntire Investment Institute At the University of Virginia

Long Pitch: Ulta Salon, Cosmetics & Fragrance,

Inc. (NASTAQ: ULTA )

Ze Zhang| October 27, 2011

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Agenda

Questions

Risk

Misperception and Catalyst

Thesis points

Stock summary

Business overview

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ULTA Business Profile

Founded in 1990 at Bolingbrook, Illinois.

Largest Beauty Retailer of Prestige, Mass and Salon Products and Services Under One Roof in the U.S.

Operating 394 Stores in 40 States as of April 30, 2011

Segments: retail stores, salon services and e-commerce.

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52-Week Range : $30.01 -$74.000 Levered Cash Flow: $31.14M Total Debt: $0.00 Profit Margin: 5.74%

Share Price: $68.58 Market Cap: $4.21B P/E: 46.75 EPS: 1.47 ROE: 22.71%

ULTA Stock Summary

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ULTA Thesis Points

Compelling Leadership in Industry

Momentum in Growth and Strategy

Stable and Steady Financial Position

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Thesis 1: Compelling leadership in industry

ULTA offers a broad selection of over 21,000 beauty products across all categories.

Marketing positions of “one-stop shopping for prestige, mass, and salon products” at all prices

Comparative Advantage

• Diversification

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Thesis 1: Compelling leadership in industry

Great and unique positions – high traffic off malls

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Thesis 1:Compelling leadership in industry

Customer Loyalty Program

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Thesis 1:Compelling leadership in industry

VAR: Appointment w/ store manager Cathy. “ … I ’ l l s ay 7 0 % o f t h e customers have a ULTA card and 50% of those who don’t are willing to open one. ” “…and we have new sales started every week. Some of the sales are member only and thus attract customers to go back.”

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Thesis 2:Momentum in Growth and Strategy

Wide range of spread. Increasing Comparable store sales

Successful Market Penetration

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Thesis 2:Momentum in Growth and Strategy

Rigorous plan of expansion ahead.

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Thesis 2:Momentum in Growth and Strategy

Early phrase of store

expansion. 4

3

18

5

8 8

States with more than 20 States with 10 - 20 States without stores

Store Num. Comparison

2008 2011

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Thesis 2:Momentum in Growth and Strategy

Comp Store Sales:

Differential in revenue generated by a retail chain's existing outlets over a certain period of time.

Distinct the revenue from Existing stores and Newly open stores.

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Thesis 3:Stable and steady financial position

Early stage of expansion

Numerous cash required to new store open and existing store renovation

How is the cash flow?

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Thesis 3:Stable and steady financial position

Facts: i: Currently ULTA has no long term debt outstanding. ii: Cash flow from operating activities successfully cover cash needed in expansion. iii: Superb inventory control.

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

200000

2009 2010 2011

Capital Expenditure Cash Flow from Operating Activities

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Thesis 3:Stable and steady financial position

Superb Inventory Control:

Inventory Turnover = 4.44

Cash Conversion Cycle.

ULTA manages to grow revenue while decreasing inventory per store feet.

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Market Misperceptions & Catalyst

Economic crisis and volatility in global economic conditions will affect beauty product industry and ULTA’s financial

condition, especially liquidity.

The stock is over-valued with a P/E of higher than 35.

Shift of distribution Channel

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Influenced by Economic Crisis?

Responsive Supply and Demand

Great Ability to Self-Adjust

Resistant to Economic Crisis

How much is it? It depends…

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High P/E à Overvalued?

Normal trend of P/E during accelerating growth

ULTA is on its way to industry monopoly with aggressive

expanding rigorous growth.

Also interesting: EV/EBTIDA, a more accurate measurement of value, is

18.40 . PEG: 1.65 Is ULTA like Home Depot?

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Catalyst: Distribution Channel Shift

•  Consumers Started to Demonstrate a Preference for the Specialty Store Experience vs. Department Stores

•  Specialty Stores Displaying Fastest Channel Growth and

Smallest Market Share

Specialty Stores has the greatest CAGR

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Risks

•  Sales Decrease.

•  Unable to gauge beauty trends and react to consumer

preference change.

•  Few barriers to entry and threat of competitors

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Recommendation

Initiate an initial position of 3% and increase it as time passes.