ULTA BEAUTY (ULTA STOCK) 2Q'24 RESULTS! WARREN BUFFETT BUYING VALUE STOCK?
Summary
TLDRUlta 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
- ๐ 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.
- ๐ 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.
- ๐ 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.
- ๐ 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.
- ๐ 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.
- ๐ 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.
- ๐ 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.
- ๐ 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.
- ๐ก 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.
- ๐ฎ The script suggests that while Ulta's growth may be slow, the potential for a low-teens return on investment over time,ๅ ไธ 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
๐ 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.
๐ 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.
๐ก 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.
Mindmap
Keywords
๐กUlta Beauty
๐กStock Performance
๐กEarnings Per Share (EPS)
๐กWarren Buffett
๐กFree Cash Flow
๐กComparable Store Sales
๐กGross Margins
๐กEnterprise Resource Planning (ERP)
๐กMarket Multiples
๐กShare Repurchases
๐กCompetitive Intensity
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
quick plug recently Robin a premium
member of unravel investing commented
this is a direct quote I'm an extremely
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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
been helpful for you talk about UL stock
why it's down why buff it might in
theory be buying it and if so please
make a point of hitting that Thumbs Up
Hit That subscribe button if you found
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for watching unrivaled investing
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