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.