Ulta Beauty Plummets Post-Earnings; Buffett Favorite Now a Buy Opportunity?

This marks the first revenue miss for the beauty retailer since December 2020, driven by a drop in same-store sales. Comparable sales fell 1.2% in Q2, compared to an 8% increase in the same period last year.

Despite the recent challenges, Ulta Beauty has achieved an average annual net store growth of 3.5% over the past three years and managed to expand its store count even during the height of the COVID-19 pandemic. Over the past five years, average comparable store sales growth has been 8.8%.

The company has now revised its full-year comp store sales guidance to flat to a 2% decline, down from the previous forecast of a 2% to 3% increase.

“While we are encouraged by many positive indicators across our business, our second quarter performance did not meet our expectations, driven primarily by a decline in comparable store sales. We are clear about the factors that adversely impacted our store performance, and we have actions underway to address the trends,” CEO Dave Kimbell said in the earnings conference.

According to Circana, U.S. beauty growth is expected to slow to around 3% by the first half of 2024, with high-end beauty products seeing high single-digit growth and mass-market beauty products maintaining low single-digit growth.

"Consumer behavior is starting to shift as consumers increasingly focus on value and become more cautious with their spending," Ulta CEO Dave Kimbell said during a conference call.

Besides, Ulta is currently facing increased competition from physical retailers such as Sephora, Target, and Walmart, as well as online giants like Amazon.

Kimbell noted that Ulta’s market share is under continuous pressure, particularly in the high-end cosmetics and hair care sectors.

"What is unique about the current environment is the scale and pace of change. More than 80% of our stores have been impacted by one or more competitive openings in recent years, with more than half impacted by multiple competitive openings," Kimbell said.

However, he expressed confidence in the company's long-term prospects. "These competitive pressures will likely continue into the near term. But the positive signals I highlighted in our broader business—the guest engagement, the impact of newness, the impact of our new stores, the success of our salon business, the loyalty growth—all of those factors suggest to us and give us a lot of confidence."

Warren Buffett’s Berkshire Hathaway made a new bet on Ulta Beauty Inc. during the second quarter, purchasing approximately 690,000 shares valued at around $266 million, according to 13F filings released in mid-August. This holding represents about 0.1% of Berkshire’s total portfolio.

Known for his successful investments in consumer stocks, Buffett’s move garnered significant market attention, pushing Ulta shares up more than 11% the day after the disclosure.

However, Wall Street analysts are not as optimistic. Following Ulta’s earnings release, several major firms downgraded their price targets for the company.

Citi analyst Kelly Crago lowered the price target on Ulta Beauty to $345 from $375, maintaining a Neutral rating. Crago cited the company’s "weak" Q2 results and reduced fiscal 2024 guidance as indicators of ongoing challenges, according to a research note.

Wells Fargo reduced its price target to $300 from $325, describing Ulta’s latest earnings report as "another tough print." The firm noted that second-quarter comparable sales turned negative, leading to a disappointing performance and a significantly lowered outlook for the second half. Wells Fargo reiterated its Underweight rating.

Furthermore, BofA cut its price target on Ulta Beauty to $380 from $425 while maintaining a Neutral rating. Stifel analyst Mark Astrachan also lowered the price target to $385 from $475, keeping a Hold rating.

While Wall Street analysts often focus on recent quarterly performances, Buffett’s investment approach tends to be more long-term.