Ulta Beauty (ULTA) saw a significant surge in its stock price Thursday after Warren Buffett’s Berkshire Hathaway (BRK) disclosed a substantial investment in the cosmetics retailer.
The news, which revealed that Berkshire had acquired 690,000 shares valued at $266 million by the end of the second quarter, sent Ulta’s shares up 12% to $366.34, marking the stock’s largest single-day gain since 2022.
This rally comes as a welcome boost for Ulta, which had been down 33% year-to-date before the news broke. Analysts at Oppenheimer, who rate Ulta as Outperform with a $450 price target, view Berkshire’s investment as a strong endorsement of the company’s long-term prospects. “We view this development as a vote of confidence for the company’s longer-term prospects and a further validation of ULTA’s significantly discounted valuation,” wrote analysts Rupesh Parikh and Erica Eiler.A Closer Look at the Numbers
Despite the recent boost, Ulta’s stock performance has been under pressure. As of Wednesday's close, the stock was trading at 12.8 times its earnings per share over the past 12 months, significantly below the S&P 500's average of 22.9 times. The disparity underscores the challenges Ulta has faced this year, particularly after the company revised its fiscal 2024 revenue and earnings forecasts downward in May.
In its first-quarter earnings report, Ulta managed to beat estimates but warned of increased competition and shifting consumer behavior. CEO David Kimbell highlighted the growing number of retail locations and online channels offering prestige beauty products, which has put pressure on Ulta’s market share. As a result, the company has been forced to reassess its outlook, forecasting lower same-store sales growth and operating profit margins for the full year.
Buffett’s Bet: A Sign of Value?
The question now is whether Ulta can sustain the momentum generated by Berkshire Hathaway’s interest. While last quarter's earnings showed only modest sales growth of 3.4%, half of which was driven by new store openings, the company’s same-store sales grew just 1.6%. Compounding these challenges, Ulta’s operating profit margins contracted by 210 basis points, falling to 14.7%. The retailer responded by lowering its full-year sales and profit guidance, signaling a cautious outlook amid a competitive landscape.
However, Ulta’s management appears to share Buffett’s optimism about the company’s long-term value. The company plans to spend $1 billion on share buybacks this year, a move that indicates confidence in the stock’s current valuation. With the stock trading at just 12.5 times earnings, both Ulta and Buffett may see significant upside potential, particularly if the company can navigate the competitive pressures it faces.
The Broader Context: Berkshire’s Strategy
Berkshire Hathaway’s investment in Ulta Beauty is part of a broader pattern of selective buying by the conglomerate. In the second quarter, Berkshire also acquired stakes in Heico, an aerospace supplier, and Chubb, an insurance company, while trimming its positions in other holdings like Chevron (CVX) and Capital One. Notably, Berkshire eliminated its stake in Snowflake, a move that may reflect Buffett’s cautious approach to richly valued IPOs.
The Ulta investment, though relatively small for Berkshire, suggests that either Buffett or his investment managers, Todd Combs and Ted Weschler, see value in the beaten-down stock. Given Ulta’s market position and the ongoing challenges in the retail space, this vote of confidence could signal that the worst may be behind the cosmetics giant.
For now, investors will be closely watching Ulta’s next earnings report on August 29 for further signs of whether the company can capitalize on this newfound momentum.
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