Hidden Gems in Retail: Ulta Beauty, Southwest Airlines, Sprouts Analysis

🌟 Finding Turnaround Opportunities

In investing, the biggest gains often come from places nobody is paying attention to. Today, I'll introduce three hidden gems discovered in retail and services.

Each company is undervalued for different reasons, but their fundamentals are solid and recovery potential is high.

💄 Ulta Beauty: The Dominant Force in Beauty

Why Beauty?

Beauty is one of the most resilient areas of consumer spending. Even during economic slowdowns, people still spend on cosmetics, skincare, and self-care. And Ulta dominates this category.

🎯 Ulta's Strengths

Loyal Customer Base
- Over 44 million loyalty members
- Drives repeat business
- Pricing power over competitors
Expanding Business
- New store openings
- Growing high-margin services (salon, skincare)
- Partnerships with Target and Kohl's
Excellent Capital Allocation
- 22% return on invested capital, and growing
- This matters because it means they get high returns when reinvesting in the business

📊 Key Financial Metrics

Item	Value
Market Cap	$27 billion
Enterprise Value	$31.5 billion
Free Cash Flow (5-yr avg)	$930 million
YTD Return	+41%

Wait! Up 41% this year alone? Yes, exactly. So we need to reassess if the current price is attractive.

💰 Fair Value Analysis

My 10-year analysis:

Revenue growth: 3%, 5%, 7%
Profit margin: 9.5%, 10.25%, 11%
PE multiple: 17x, 19x, 21x

Results:

Current price: $607
Low estimate: $418
Mid estimate: $560
High estimate: $750

Just because it's up 41% doesn't mean fundamentals improved 41%! Always remember the relationship between price and value.

✈️ Southwest Airlines: The Legend of 47 Years

Why Airlines?

"Airlines are a tough business" - Warren Buffett has said this many times. They're capital intensive, margins get squeezed easily, and you're at the mercy of fuel prices, unions, and global events.

But Southwest is different.

🎯 Why Southwest Is Special

47 Consecutive Years of Pre-COVID Profitability
- How many airlines went bankrupt during that same period?
- This is unprecedented in the industry
Margin Recovery Potential
- 10-year average profit margin: 4.8%
- Pre-COVID: Routinely 10-15%
- Recent: 1.4%
- Why wouldn't they return to historical levels?
Recent 25% Surge
- Driven by higher-than-expected profit margins
- Exactly the scenario I was anticipating

📊 Key Financial Metrics

Current eight pillars look rough. Four X marks. But this is because they're recovering from COVID numbers.

💰 Fair Value Analysis

My 10-year analysis:

Revenue growth: 3%, 5%, 7%
Profit margin: 8%, 11%, 14%
PE multiple: 14x, 17x, 20x (conservative for airlines)

Results:

Current price: (at time of analysis)
Low estimate: $62
Mid estimate: $110
High estimate: $180

Even with just 8% profit margin, 14x PE, and 3% growth, I get $62. Pre-COVID margins were much higher. This means there's significant margin of safety.

🥗 Sprouts Farmers Market: The Health Food Dark Horse

The Most Surprising Stock

This has been the most surprising performer. At one point it soared to $170, now it's fallen below $80.

I originally bought at $31-33, then got called away at $165 through covered calls. At first I thought "Oh no, did I let a winner go?" But I remembered that $165 wasn't even close to fair value, so I was okay with it.

🎯 Why Sprouts Is Special

Riding the Health Food Trend
- Health food is a highly lucrative segment
- Industry-leading growth and margins
Amazing Margin Improvement
- 3-year compound growth: 11%
- Gross margin: 39%
- Net margin: 6% (Kroger is 1.5%!)
- Private label expansion driving continued margin gains
Growth Story
- Currently 400+ stores
- Target 1,200 stores
- Store expansion + inflation = sustained revenue growth

📊 Key Financial Metrics

Item	Value
Market Cap	$8 billion
All-time High	$182 (6-7 months ago)
Return on Invested Capital	11-12%, improving

💰 Fair Value Analysis

My 10-year analysis:

Revenue growth: 6%, 8%, 10%
Profit margin: 5.5%, 6.5%, 7.5%
PE multiple: 16x, 19x, 22x

Results:

Current price: $80
Low estimate: $96
Mid estimate: $147
High estimate: $220

A stock I bought at $31-33 is now at $80. Honestly, it's hard to call that a "good price." But as fundamentals improve, that price starts to look more attractive.

💡 Key Lessons

1. Don't Anchor to Your Purchase Price

I bought Sprouts at $33. At $80, it "feels expensive." But if fundamentals keep improving, $80 could be cheap in the future.

2. Turnarounds Take Time

Southwest is still recovering. Even if short-term metrics look bad, focus on long-term potential.

3. Margins Are Everything

Ulta: 22% return on invested capital
Sprouts: 39% gross margin, improving
Southwest: Historical 10-15% net margin

Good margins let compounding work its magic.

🎯 Conclusion

Each stock has a different story:

Ulta: Strong growth, but price has risen a lot - be cautious
Southwest: Turnaround play with high margin of safety
Sprouts: Growth + margin improvement combo

The key is to look at value, not price. Don't be swayed by short-term fluctuations - focus on fundamentals!