There’s an interesting dilemma with Ulta Beauty (ULTA). The company’s earnings could be described as disappointing, but Ulta Beauty also happens to be backed by Warren Buffett’s famous company, Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B). Like Ulta Beauty’s customers, the Oracle of Omaha likes good value. With these in mind, I am cautiously bullish on ULTA stock, not because the harsh financial facts can be ignored but because the bad news about Ulta Beauty has already been priced into the shares.
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I wouldn’t call Ulta Beauty’s financial profile “beautiful,” the company’s problems aren’t just cosmetic. However, the market has punished Ulta Beauty, and value seekers are supposed to look for opportunities like this. Ultimately, we might get a better idea of why Buffett and Berkshire Hathaway chose to invest in Ulta Beauty this year.
Ulta Beauty: Consumers Are Cutting Back
Ulta beauty is an American beauty retailer that offers its costumers cosmetics and other beauty-related products in retail stores and online.
As stated, I am cautiously bullish on ULTA stock and will elaborate on what I like in the company, mainly its P/E ratio and general valuation. However, first, I would like to examine Ulta’s disappointing Q2 results.
After reading Ulta Beauty’s financial report for the second quarter of Fiscal Year 2024, it’s evident that consumers are cutting back on purchases of Ulta Beauty’s products. The report didn’t state this outright; we only need to read between the lines and connect the dots.
As inflation forces shoppers to choose necessities over beauty supplies, the numbers negatively impact Ulta Beauty’s top-and-bottom-lines. For example, Ulta Beauty’s comparable-location sales (which includes sales for stores open at least 14 months as well as e-commerce sales) declined 1.2% year-over-year in Q2 FY2024. This represents a substantial decline in contrast to Ulta Beauty’s 8% rise in sales at comparable locations from the previous year’s quarter.
Furthermore, Ulta Beauty’s revenue grew 0.9% to $2.6 billion. This might not seem disappointing at first glance. However, Ulta Beauty acknowledged “new store contribution” as a primary driver of this revenue growth. The company opened 16 new stores in Q2 FY2024, versus only three new stores in the year-earlier quarter. Besides, Ulta Beauty’s $2.6 billion in quarterly revenue fell short of the analysts’ consensus estimate of $2.6 billion.
Next, we should observe that Ulta Beauty reported earnings of $5.30 per share in Fiscal 2024’s second quarter. That’s down from $6.02 per share in the year-earlier quarter, and it’s a miss when compared to Wall Street’s consensus forecast of $5.45 per share.
Berkshire Hathaway Bought Ulta Beauty Stock
Although quarterly results show a clear cut on customer purchases, there is much to like about ULTA, and Buffet himself must have thought so as well.
Before Ulta Beauty released its Q2-FY2024 results, Berkshire Hathaway purchased 690,000 shares of Ulta Beauty stock, worth $266 million at the time, at the end of this year’s second quarter. Buffett surely knew beforehand that Ulta Beauty faced challenges due to a pullback in consumer spending.
Still, Buffett and Berkshire don’t make share purchases without deep research and forethought. Buffett must have seen something positive about Ulta Beauty, or at least detected a good value with ULTA stock.
Buffett isn’t known for disclosing the reasons why he purchases specific stocks. However, given the company actively opened new stores (on a net basis) in the second quarter, There’s a clear sign Ulta’s management expects consumer activity to pick up soon.
ULTA’s Attractive Valuation
In order to establish the bullish sentiment, we have to look at Ulta Beauty’s quarterly EPS track record. It’s a very good track record, with Ulta Beauty’s recent EPS miss being the exception rather than the rule.
Additionally, if Buffett had evidently thought ULTA stock was a good value earlier this year, it might have been an even better value now. Notably, Ulta Beauty’s GAAP-measured trailing 12-month price-to-earnings (P/E) ratio is 14.16x. This is favorable compared to the sector median P/E ratio of 18.39x and Ulta’s five-year average P/E ratio of 30.09x.
Is ULTA Stock a Buy, According to Analysts?
On TipRanks, ULTA is a Moderate Buy based on the 10 Buys, seven Holds, and one Sell ratings assigned by analysts in the past three months. The average Ulta Beauty stock price target is $467.82, implying a 32.59% upside potential.
If you’re wondering which analyst you should follow for ULTA stock, the most profitable analyst covering the stock (on a one-year timeframe) is Christopher Horvers of JPMorgan Chase (JPM), with an average return of 7.70% per rating and a 63% success rate. Click on the image below to learn more.
Should You Consider ULTA Stock?
Ulta Beauty stock is down sharply from its peak price and is a Berkshire/Buffett holding. More importantly, Ulta Beauty is profitable, has a good EPS track record, and trades at a very reasonable valuation multiple. So yes, investors should consider buying ULTA stock.
Looking ahead, Ulta Beauty’s success largely depends on consumer behavior and inflation trends. Buffett may expect inflation to subside and consumers to buy more cosmetics in the coming quarters.
In any event, the market has already punished Ulta Beauty for its recent financial shortcomings. Consequently, I would consider taking a small share position in ULTA stock with a long-term time frame and realistic upside expectations.
