ULTA BEAUTY (ULTA STOCK) 2Q'24 RESULTS! WARREN BUFFETT BUYING VALUE STOCK?

Summary

Ulta Beauty's stock (UAL) has declined by 3-4% following Q2 results and a lowered full-year outlook. Despite steady growth in cosmetics, the company faces challenges like increased competition and lower consumer spending due to inflation. Notable investor Warren Buffett has bought into Ulta, possibly attracted by its value and potential for steady returns. The company operates around 1,400 stores in the US and is considering international expansion. Management's focus on share buybacks and the durability of the cosmetics market could offer long-term value, although recent quarterly results have been underwhelming.

Takeaways

• 📉 Ulta Beauty's stock (ULA) has declined by 3 to 4% following their Q2 results and a reduced full-year outlook to approximately $24 per share in earnings.
• 🎉 Noted value investor Warren Buffett, who recently celebrated his birthday, has been a buyer of Ulta, although it's a small position in his portfolio.
• 🔄 Despite a stagnant stock price over the last 5 years, Ulta's underlying fundamentals have shown improvement, with the business generating over a billion dollars in free cash flow annually.
• 💄 The company operates around 1,400 retail stores in the U.S., offering more than 25,000 products from various brands, with a significant portion of sales coming from cosmetics, skincare, and hair care.
• 🌐 Management has indicated a potential for growth, with plans to expand to 1,500 to 1,700 freestanding locations in the U.S. and explore opportunities in Mexico.
• 📈 Q2 results showed a 0.9% increase in net sales, but this was overshadowed by a nearly 2% decrease in transactions and a 0.6% increase in average ticket price, indicating shoppers are buying less.
• 📊 The company's profitability has been affected, with operating income dropping to around 13.3% net of sales, compared to nearly 16% the previous year.
• 🛒 Management has attributed the Q2 performance to factors such as normalization of growth after significant gains, increased competitive intensity in the beauty category, and disruptions from their ERP system.
• 💡 Warren Buffett's investment approach to Ulta could be seen as a classic value play, focusing on a cheap, predictable business with the potential for reasonable returns over time.
• 🔮 The script suggests that while Ulta's growth may be slow, the potential for a low-teens return on investment over time,加上 cash dividends, could make it an attractive long-term investment for value investors like Buffett.

Q & A

What was the reason behind Ulta Beauty's stock price decline?

Ulta Beauty's stock price declined due to their second quarter results and a cut in their full-year outlook to around $24 per share in earnings.

What is Warren Buffett's relationship with Ulta Beauty?

Warren Buffett, a noted value investor, was a buyer of Ulta Beauty in the past quarter, although it's a small position for him.

How has Ulta Beauty's stock performance been over the last 5 years?

Over the last 5 years, Ulta Beauty's stock has roughly gone nowhere, breaking even despite the underlying fundamentals continuing to improve.

What impact did the COVID-19 pandemic have on Ulta Beauty's sales?

The COVID-19 pandemic led to a decrease in makeup sales as people were using less makeup and potentially relying more on AI filters or Instagram filters.

What are the main product categories for Ulta Beauty?

The main product categories for Ulta Beauty are cosmetics (over 40% of revenue), skincare (19%), and hair care (19%).

How many retail stores does Ulta Beauty currently operate?

Ulta Beauty operates around 1,400 retail stores across the United States.

What is the potential for store growth for Ulta Beauty in the US?

Management has indicated a potential for 1,500 to 1,700 freestanding locations in the US, suggesting a 10-20% potential growth from the current base of 1,400 stores.

What challenges did Ulta Beauty face in their second quarter results?

In the second quarter, Ulta Beauty faced challenges such as a nearly 2% decrease in transactions, a disruption from their ERP system, and marketing plans that did not yield expected results.

What is the potential for international expansion for Ulta Beauty?

Ulta Beauty is considering expanding into Mexico, which could help accelerate their growth.

Why might Warren Buffett be interested in Ulta Beauty?

Warren Buffett might be interested in Ulta Beauty due to its cheap valuation, predictability, and the potential for a reasonable return over time through a combination of fundamental growth and financial engineering such as share repurchases.

What are the risks associated with investing in Ulta Beauty according to the script?

The risks associated with investing in Ulta Beauty include increased competitive intensity in the beauty category, potential saturation in the US market limiting new store openings, and the impact of economic downturns on consumer spending on luxury goods.

Outlines

00:00

📉 Ulta Beauty's Stock Decline and Business Overview

Ulta Beauty's stock is down 3-4% due to their second-quarter results and a reduced full-year outlook to around $24 per share in earnings. Noted investor Warren Buffett, who recently bought a small stake in Ulta, may see value in its steady performance over the last five years despite the stock's stagnation. The company has a strong presence with 1,400 retail stores in the US, offering over 25,000 products. Sales are primarily driven by cosmetics (40%+ of revenue), followed by skincare and hair care. The company has been adding new stores annually, suggesting room for growth. Management has indicated a potential for 1,500 to 1,700 freestanding US locations and possible international expansion into Mexico.

05:01

🔍 Analyzing Ulta Beauty's Q2 Results and Challenges

In the second quarter, Ulta Beauty's net sales increased by 0.9%, but this was less than investor expectations. Comp sales decreased due to a nearly 2% drop in transactions, indicating shoppers are buying less, and a 0.6% increase in average ticket. Management cited several reasons for the disappointing results, including normalization of growth after significant gains, increased competitive intensity in the beauty category, and a loss of market share in certain tiers. They also experienced disruptions due to an ERP system issue affecting store inventory allocation and underperforming marketing plans. Despite these challenges, the company's gross margins remained stable, but operating income and earnings per share saw a significant drop, leading to an outlook cut for the year.

10:03

💡 Warren Buffett's Potential Interest in Ulta Beauty

The video speculates on Warren Buffett's potential interest in Ulta Beauty, considering his investment style and the company's current situation. Buffett is known for investing in companies that are undervalued, have predictable cash flows, and are in industries with durable demand, such as cosmetics. Ulta Beauty fits this profile, with a history of steady growth even during economic downturns. The company's management has been shareholder-friendly, with significant share buyback programs. The video suggests that with a low valuation, a predictable business model, and potential for growth through store expansion and international markets, Ulta Beauty could offer a reasonable return on investment. However, the video also acknowledges the challenges faced by the company, including increased competition and the impact of COVID-19 on consumer behavior, which could affect future performance.

Keywords

💡Ulta Beauty

Ulta Beauty is a prominent beauty retail chain in the United States, known for its extensive range of cosmetic, skincare, and haircare products. In the video, the discussion revolves around the company's stock performance, financial results, and future outlook. The script mentions that Ulta Beauty has around 1,400 retail stores and carries around 25,000 different products, highlighting its significant market presence.

💡Stock Performance

Stock performance refers to the way a company's stock value changes over time, reflecting investor sentiment and market conditions. The video discusses how Ulta Beauty's stock (symbol: ULA) has seen a decline of around 3 to 4% following their second-quarter results and an adjusted full-year outlook. This is a key focus as it directly impacts investor decisions and the company's market valuation.

💡Earnings Per Share (EPS)

Earnings Per Share (EPS) is a financial metric that shows the portion of a company's profit allocated to each outstanding share of common stock. The video mentions that Ulta Beauty has cut its full-year outlook to around $24 per share in earnings, indicating a revision in the company's profitability expectations, which is a significant factor for investors.

💡Warren Buffett

Warren Buffett is a renowned value investor and the chairman of Berkshire Hathaway. The video script notes that he has been a buyer of Ulta Beauty stock, suggesting that he sees value in the company despite its recent performance. This is significant as Buffett's investment decisions are closely watched and can influence market sentiment.

💡Free Cash Flow

Free Cash Flow (FCF) is the cash a company generates after accounting for capital expenditures. It is a key indicator of a company's financial health and ability to generate cash for shareholders. The video discusses Ulta Beauty's free cash flow profile, indicating that the business generates around a billion dollars plus in FCF per year, which is a positive sign for investors.

💡Comparable Store Sales

Comparable store sales, or comp sales, refer to the sales growth of stores that have been open for a certain period, typically one year. This metric is crucial for retailers as it indicates the performance of existing stores. The video mentions a decrease in comp sales, which is a negative signal for investors as it suggests a potential slowdown in growth.

💡Gross Margins

Gross margins indicate the amount of profit a company makes after accounting for the cost of goods sold. The video discusses how Ulta Beauty's gross margins are affected by inflation and pricing strategies, which is a critical factor in understanding the company's profitability and cost management.

💡Enterprise Resource Planning (ERP)

Enterprise Resource Planning (ERP) systems are integrated software that organizations use to manage their business processes. The video mentions disruptions from Ulta Beauty's ERP system, which impacted store inventory allocation and sales, illustrating the importance of efficient operational systems for retail success.

💡Market Multiples

Market multiples are ratios used to value a company's stock based on its market capitalization. The video discusses the potential market multiples for Ulta Beauty in the future, which is a way to estimate the company's valuation and potential return on investment.

💡Share Repurchases

Share repurchases occur when a company buys back its own shares from the market, typically to return capital to shareholders or to increase the value of remaining shares. The video mentions Ulta Beauty's share repurchase plans, which can be a positive signal to investors as it indicates the company's confidence in its financial position.

💡Competitive Intensity

Competitive intensity refers to the degree of competition within an industry or market. The video highlights management's concerns about increasing competitive intensity in the beauty category, suggesting potential challenges for Ulta Beauty in maintaining market share and growth.

Highlights

Ulta Beauty stock (ULA) is down 3-4% following Q2 results and a cut in full-year outlook to around $24 per share in earnings.

Value investor Warren Buffett, who recently bought a stake in Ulta, might see value in its steady performance over the last 5 years despite market challenges.

Ulta Beauty has seen a steady march in cosmetics sales, with a minor dip during the COVID-19 pandemic due to reduced makeup use.

The company generates over a billion dollars in free cash flow annually, indicating a strong financial position.

Ulta Beauty operates around 1,400 retail stores across the US, offering around 25,000 products from various brands.

Cosmetics account for over 40% of Ulta's revenue, with skincare and hair care making up significant portions as well.

The company has been adding new stores annually, suggesting ongoing expansion and market penetration.

Management has indicated a potential for 1,500 to 1,700 freestanding locations in the US, showing room for growth.

Ulta Beauty is considering international expansion, particularly into Mexico, which could accelerate growth.

Q2 results showed a 0.9% increase in net sales, which was below investor expectations.

A nearly 2% decrease in transactions and a 0.6% increase in average ticket suggest consumers are buying less but spending more per purchase.

Management cited increased competitive intensity in the beauty category as a challenge, potentially impacting market share.

Disruptions from their ERP system led to inventory allocation issues, negatively impacting sales.

Management's marketing plans did not yield the expected results, contributing to the earnings decline.

Warren Buffett's investment strategy often focuses on companies that are cheap, predictable, and capable of delivering reasonable returns over time.

Ulta's management has been shareholder-friendly, with significant share buybacks returning capital to investors.

Long-term potential growth, store base expansion, and international opportunities could contribute to Ulta's future success.

Despite recent challenges, Ulta has a history of durability, showing growth even during the Great Financial Crisis.

The speaker suggests a more conservative outlook for Ulta, with lower revenue growth and tighter valuation ranges.

Ulta's potential for outperformance is acknowledged, but the speaker remains cautious due to the current market conditions and retail sector challenges.

Transcripts

Ulta beauty stock Ula is down around 3

to 4% today following their second

quarter results and cutting their ful

year outlook to around $24 per share in

earnings notable value investor Warren

Buffett happy birthday Mr Buffett if

you're tuning in to the unrivaled

channel uh he was a noted buyer of Ulta

in the past quarter it's a tiny position

for him but it is interesting to see

that he seen value in it perhaps because

the stock has roughly gone nowhere for

The Last 5 Years you know roughly break

even over the Last 5 Years despite the

fact that the underlying fundamentals

have continued to improve you can see

how yes there was a covid impact where

you know folks said hey I don't need to

wear as much makeup maybe I'm going to

use a uh Instagram filter instead or

something like that and use a little AI

to look a little bit better uh but

outside of that you do have this sort of

steady March in terms of cosmetics and

Wall Street was expecting continued

growth in the years ahead and you know

looking at the free cash flow profile

pretty similar you know you do get some

lumpiness but overall you're talking

about a business generating around a

billion dollars plus in free cash flow

per year looking at the business itself

you're talking about a brand Ulta beauty

that has around 1,400 retail stores

across the United States uh carrying

around

25,000 different products different

brands stock keeping units so you have

these big stores 10,000 square feet

carrying a lot of different brands and

you can see most of their sales are tied

to Cosmetics that's 40% plus of their

revenue another 19% is skincare another

19% is hair care so you can see quickly

these top three represent the line share

of this business you do have additional

Services Salon type services but this is

the small fraction of the total when

you're looking at the big picture

thinking about this business it is

interesting to see that they've been

steadily adding new stores each year so

suggesting that hey you know they're

still filling out their footprint you

know a couple percent more each year now

it's around 1,400 so I I wanted to know

you know has management indicated how

many stores they can open up over time

you know this is something that they

might mention in one random transcript

or sometime in the last few years do

they have a long-term goal also is

international expansion another

potential driver so this is just

something I quickly want to know I

personally use AI ticker chat I'm one of

the co-founders and chatting now is

completely free so feel free to check

that out if you're interested so this is

an example of chatting about Ulta Beauty

and the answer is that yes you know and

you I can go to the source documents if

I'm interested but yes management has

effectively said 1,500 to 1700 uh

freestanding locations in the US so

versus the 1400 base you know you're

talking about 10 20% potential growth

there but they're also talking about

expanding into Mexico over time so that

could help accelerate their growth but

looking at their second quarter results

I'd say broadly kind of stinky you know

net sales increased

0.9% investors clearly were expecting

more comp sales so this is talking about

the you know effectively their mature

store base as well as their e-commerce

sales that actually decreased investors

don't like to see that uh this was

driven by a nearly 2% decrease in

transactions this means shoppers are

effectively purchasing less and a 0.6%

increase in average ticket this has been

a trend that you've now seen with a few

different uh retailers where they sort

of have this challenge of look we need

to raise prices to deal with inflation

but as you raise prices ultimately do

have the effect that the consumer their

wallet hasn't caught up and so you know

they they can't buy as much uh luxury

goods and this has been a key aspect

that management actually calls out on

the call not only the challenge consumer

and you've seen that with with um sort

of lower tier you know stores like

Dollar General recently which also you

know the stock fell something like 30%

this past week so you're you're seeing

that dynamic in retail broadly this

inflation you know sort of squishing the

consumer and making it tougher for the

retailers uh to prosper and so you see

gross margins okay so they're passing on

inflation But ultimately you have lower

merchandise margins so their gross

margins decline but then you look you

still have to play pay your you know

your your rent you still have to pay

your general admin expenses you know the

Salesforce and so as a result you know

your your cost as a percentage of

Revenue increased because you know the

sales aren't growing enough and their

margins are declining and so looking at

this you know you're looking at their

profitability their operating income

dropping to around 133% Net of sales

versus closer to 16% last year a sizable

drop in earnings per share so this is

why you're seeing this Outlook cut for

the year for this is why the stock is

down and management gave a bunch of

reasons why and so once again going to

AI Chiago in the most recent quarter

list the reasons that their results

stunk and you know these are just the

top couple which is that that that

management called out which is growth is

normalizing after three years of

significant gains they're talking about

increasing competitive intensity among

the beauty categor so that's a direct

quote and this is important to call out

because that's that's always something

you want to dig further into if

management talking about you know like

increased competitive intensity does

that mean you're potentially losing

market share to someone else and during

the call management effectively said

look there's a couple of different tiers

within Beauty there's sort of the

highend and then there's Mass Appeal and

they're suggesting that they are losing

share in some of these categories I

believe some of the higher end tiers but

sort of mass they're holding on so you

know that does reflect look competition

is a real thing that means it's not you

in my mind I want this sort of the

unrivaled story where it's very very

clear this is how you're going to win

over time and this is this makes the

story harder ultimately when you're

saying hey competition is is sort of

eating your lunch but I will talk about

just a second what is Buffett see or

what is his lieutenants at Burkshire

hathway see I believe maybe it's Todd

Colmes uh C in this another excuse that

management called out for why their

results stunk during the quarter seeing

an earnings decline was they had a

disruption from their Erp so that's

their enterprise resource planning

system which led to disruptions in their

store inventory allocation so that

impacted sales they also talked about

how there and this is you know if I were

to keep going through this list uh you

know management talked about their their

marketing plans didn't quite work out

and didn't have the uplift that they

expected okay so what are my thoughts on

Ulta uh first of all in full disclosure

this is not Financial advice also a

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check out unrivaled investing so

thinking about Warren Buffett and

Berkshire hathway and his lieutenants

buying starting to buy a steak in Ulta

it's this is a classic Warren Buffett

checklist maybe I'll make a whole

separate video on effectively the two

types of Warren Buffett checklists that

are out there in my mind uh that he's

publicly called out if if that would be

helpful for you let me know and I'll uh

I'll consider making that video um but

this is you know this is a classic type

of setup cheap predictable and being

able to pencil out a reasonable return

over time and by Cheap you know you

could see even though they've cut this

Outlook from 11 and a half 11.6 billion

in sales to closer to 11 billion

comparable store sales going from low

single digits to Flat maybe slight

decline uh you know they've kept most of

their projection the same except you

know earnings are taking a bit of a

haircut from $26 per share to $23 a

share so you you know you are talking

about relatively cheap you know around

13- 15 times EPs and personally when I'm

looking at something like this what I

personally want to do is I always try to

size up management and ideally I have

Founders that's you know you're not

going to have that case here uh so if

you don't have the founders you're going

to say hey is all this Capital getting

returned to me is it management

extremely shareholder friendly and so

far their policies do seem to be

friendly where they're just buying back

tons of stock uh you know they talked

about how share repurchases around $1

billion I already called out they're

already doing around a billion dollars

on free cash flow so you know that means

the vast majority of the free cash flows

going to shareholders reducing the

shares outstanding and you know if you

think this the shares are cheap at 13 to

15 times which Buffett does uh you know

then it's it's a nice way of reducing

the share count by a couple percent each

year and the logic is fairly simple

simple you know if you if you let's say

let's say it's at 15 times going forward

valuation doesn't expand you know at 15

times if they take all their free cash

flow and buyback stock one divided by 15

you're talking about around 7% buyback

per year ballpark so then if you overlay

that with the fundamental growth of the

business so you say hey what do I think

net earnings could do over time and

let's say you layer on maybe another 5%

long-term potential growth that's you

know talk about their store base talk

about inflation talk about new products

talk about uh Mexico expansion so you

consider that that 5% plus the financial

engineering of share repurchases and now

you're talking about a teens type of

return over time low teens not High

Teens but low teens type of return over

time so you know you could start to see

how you know a value investor like

Warren Buffett could say okay you know

like I I get this you know this is this

is the this is why I want to buy it now

keep in mind Buffett has like nearly a

$300 billion cash stockpile he's been

selling his Apple he's been selling his

Bank of America so if he wanted to buy

all of Ulta it' be it would be easy for

him he could buy it with the interest

alone over time if he wanted to uh but

this is you know I I I sort of view this

as a uh he enjoys the game his

lieutenants enjoy the game and it's just

like okay I'll put on a small you know a

side bet you know um in terms of

following this may maybe we make a

little bit of money maybe make you know

10 to 15% type of returns over time in

theory so so first is cheap you can get

that second is predictable women love

makeup I think that's not contr I I I

hope hopefully I don't get canceled for

saying something like that um but yes

women women generally love makeup it's

it's how they stand out uh often times

you know showing off their features you

know and and you want to uh look good as

you can tell I I wear a lot of makeup no

I I do not wear any makeup um but you

can see looking at their historic

results that even during the Great

financial crisis this was a growth story

growing at least 10% per year and I

think that's important to to say just

because that reflects the durability the

predictability of this business that

said at that time it was that growth

story because they could continue to

open up new stores that's much less now

because as Management's called out

they're closer to that ceiling in terms

of what they could do with us the

question is can you start let's say

evolving with the riskier international

expansion maybe they can deliver on that

um so you know we'll see the the big

decline was in response to covid where

people were using more of those AI

filters uh hey I don't need it I'm I'm

going to be on Zoom type of thing

looking at the return framework this is

using AI ticker chat in the predict

feature and you know this is ai ai is

saying hey this is based on reading the

transcripts based on reading you know

based on what it knows about the

industry what management has said it's

effectively saying low teens margins you

know singled digigit type of growth over

time and maybe you get to a market

multiple give or take in the next five

years in which case you're talking about

nearly 100 to 200% return overtime plus

the cash and I already called out that

around 7% cash that goes to you each

year and so if you factor that in even

in the downside where the price doesn't

increase that much uh you are going to

benefit because this cash is in theory

going to go to you um and that could

help juice the return so this is I think

why Buffett is is buying this you know

is BU has has bought a little bit of

Ulta stock personally I think these

assumptions are a little too um in some

cases a little too aggressive so I'm

going to tweak it myself and so I'm

going to put in my own assumptions of

only two to four only 2 to 6% Revenue

growth compounded over time 13 to 15%

margins and I'm going to do a Tighter

and lower valuation range maybe I'm just

more conservative maybe that's just my

take and I'm sort of getting close sort

of break even and then you know getting

some upside of around 100% it does get

better when you factor in the cash flow

that can go to shareholders so it

wouldn't surprise me if Ulta works well

over time I personally given that the

fundamental growth isn't really jumping

out and you're seeing that with negative

comps I personally am in the camp that

these types of stories especially with

retail you know who knows if you get a

type of recession type of thing

you know if you have something like that

you know could you just get a crazy

cheap valuation so that's sort of my

mentality that said it would not

surprise me if Ulta does outperform the

markets over time you know when you have

this sort of framework I just personally

like I'm so let's say Ulta is growing

you know very slowly maybe you can

pencil out 5% growth over

time uh and it trades around 15 times

well just this past week in my life I

called out a company that's effectively

at 15 times and growing closer to 20 to

30% a year so obviously like that math

is much more compelling long term

obviously different types of risks but

you know that's why every investor has a

different different Journey you know

they figure out what's comfortable for

them what they're looking for anywh who

I hope this video calling out Ulta has

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