Warren Buffett, the legendary investor and affectionately nicknamed “Oracle of Omaha,” has been known to pick up some epic stock market winners over the years. Whether it's beverage giant Coca-Cola (KO), financial services titan American Express (AXP), or his eminently profitable bet on iPhone maker Apple (AAPL), Buffett has time and again burnished his credentials as the preeminent value investor of our times.
Of course, we don't yet know if Buffett's recent $266 million bet on Ulta Beauty will turn out to be a beauty, or if it will turn out to be more of an ugly duckling in the Berkshire Hathaway (BRK.B) portfolio, like Kraft-Heinz (KHC). Let's see what Ulta has going for it.
About Ulta Beauty
Founded in 1990 by Mary Dillon and Rick DeLeon, Ulta Beauty (ULTA) is a leading beauty retailer in the United States. It offers a wide range of cosmetics, fragrances, hair care products, and skincare products. The company operates brick-and-mortar stores and an online platform, providing customers with a convenient shopping experience. The company is currently valued at $17.73 billion.
ULTA stock has lagged this year, down 24.7% on a YTD basis. However, since its listing in 2009, the stock has been a multi-bagger, gaining roughly 1,000%.
As it turns out, along with an opportunity to buy the dip, Ulta holds serious appeal for Buffett-style investors.
Ulta's Moat
The U.S. domestic beauty care market is relatively large. Currently valued at $96.1 billion, this report forecasts that it will grow to about $130 billion by 2030. Separately, a 2023 McKinsey report cites even more bullish figures for the industry on a global scale, with revenues projected to reach $580 billion by 2027.
However, the beauty and personal care industry is plagued by the challenge of fragmentation. Mass-market and big-box stores, and even pharmacies, often sell these products, but with no knowledgeable staff to handle questions. Department stores also carry beauty products, but often a limited selection.
This is where Ulta's competitive advantage kicks in - or, to borrow Buffett's language, its “moat.”
Ulta positions itself as the go-to destination for "all things beauty," offering a vast selection of products across all price ranges, supported by well-trained employees who double as sales agents and beauty consultants. The company believes the growing beauty trend in the U.S., driven by the wellness and self-care movement, presents a significant opportunity. With an aggressive lineup of new brand launches planned for the second half of this year, Ulta aims to keep its product offerings fresh and compelling.
The company's loyalty program, with over 44 million members, gives Ulta access to valuable customer data that helps refine marketing strategies and drive product positioning. Recent initiatives like Member Love and a tiered membership rewards program offering highlight Ulta's commitment to increasing customer engagement and retention. Additionally, the full-service salons and Beauty Bars in its stores, which offer hair, skin, and makeup services, further enhance cross-selling and foot traffic opportunities.
Together, these factors — product variety, knowledgeable staff, and a strong loyalty program — are expected to fuel Ulta's growth in the coming years.
Steady Earnings at a Fair Price
Ulta's earnings results for the latest quarter fell short of consensus estimates for the first time in the past 16 quarters. The company reported fiscal second-quarter net sales of $2.6 billion, up marginally from the previous year, while earnings per share (EPS) slid by 12% in the same period to $5.30, missing the consensus estimate of $5.45.
However, a look at the bigger picture shows that Ulta has grown revenues and earnings at impressive CAGRs of 14.45% and 18.22%, respectively, over the past 10 years.
Moreover, Ulta has successfully resolved its ERP (Enterprise Resource Planning) issue, which had been a significant operational hurdle earlier this year. The company completed the ERP transition in July, ensuring that all stores and distribution centers are now operating on the same software system. This alignment has helped address previous inventory management challenges, positioning Ulta for smoother operations and improved efficiency moving forward.
The company opened 16 new stores in the quarter (versus just 3 in the corresponding period of the previous year), taking the total store count to 1,411, spanning an area of 14.7 million gross square feet.
Ulta also has a Buffett-friendly balance sheet. Net cash from operating activities for the first six months of the fiscal year ended Aug. 3 came in at $359 million, as the company closed the quarter with a cash balance of $414 million - up from the previous year's balance of $388.6 million. The cash balance was also higher than its short-term debt levels of $281.3 million.
Plus, investors can buy into Ulta's future earnings at a fair price right now. The stock is trading at a forward price/earnings (P/E) ratio of 16.07 - lower than the consumer discretionary sector median of 17.42, and a healthy 42% discount to Ulta's historical earnings premiums.
Analysts Say Ulta is a Buy
Analysts remain optimistic about Ulta stock, which has an average rating of “Moderate Buy" among the 27 analysts in coverage. Thirteen have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, 11 have a “Hold” rating, and 2 have a “Strong Sell” rating.
The mean price target for ULTA is $403.75. This indicates an expected upside potential of about 9.4% from current levels.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
