Ulta Beauty stock receives a Warren Buffett boost, but risks remain

Ulta Beauty (ULTA) stock price has been under intense pressure in the past few months. After peaking at $574 earlier this year, it has sunk by over 42% and was trading at $328 on Wednesday, its lowest level in over 52 weeks.

Warren Buffett buys Ulta

The Ulta Beauty share price staged a strong comeback in the extended market session. It rose by over 14% as investors reacted to new SEC filings that showed that Warren Buffett invested in the company. 

In addition to Ulta, Berkshire Hathaway added stakes in Heico, Sirius XM and Occidental Petroleum. It also exited stakes in companies like Paramount Global and Snowflake while trimming stakes in Chevron and Floor & Decor. 

Warren Buffett bought Ulta, which it sees as a strong brand that has become highly undervalued. 

In most cases, stocks jump whenever Buffett, widely seen as the best investor in our generation invests in them. They also drop when he reveals that he has sold his shares. Most recently, Apple shares retreated after Buffett revealed that he had sold most of its shares.

Ulta Beauty’s annual revenue rose from over $6.15 billion in 2021 to over $11.2 billion in the last financial year. Its net profit has also been growing in the past few years as it moved from $175 million in 2021 to over $1.29 billion in the last financial year.

Ulta Beauty’s business is slowing

Warren Buffett’s investment came at a time when Ulta Beauty’s business was slowing. The most recent annual results showed that its revenue rose to over $2.72 billion in the first quarter from $2.63 billion in the same period in 2023. Comparable store sales rose by 1.6%.

Ulta Beauty’s profit also thinned in the first quarter, moving to $313 million from the $347 million it made in 2023. This decline was likely because of its higher tax rate and sales, general, and administrative expenses.

A key challenge that Ulta Beauty is facing is that competition in the beauty space is still escalating. In the past few years, many buyers of products in the skin, body care, fragrance, and nails have shifted their patterns and are spending money online. 

For example, customers with Amazon Prime and Walmart+ subscriptions find it easy to consolidate their purchases in these companies at the expense of Ulta. 

The company is also facing competition from individual brands that are selling their products directly to consumers. A good example of this is ELF, a company whose annual sales jumped to over $1.03 billion in 2023 from $578 million a year earlier. 

All this has led to more promotions, which have eroded its margins. Its gross margin figure dropped to 39.2%, down from 40% in the same period in 2023. The company blamed the retreat to lower merchandise margins and inventories. 

In line with this, the company is also seeing higher inventories as the figure rose to $1.9 billion, which it attributed to new product launches and store openings. In most cases, higher inventories are usually bad for retailers. 

Ulta earnings ahead

Ulta Beauty stock’s next key catalyst will be its upcoming earnings, which are scheduled for August 28. Analysts expect its revenues will come in at $2.6 billion, up from the $2.5 billion it made in the same period in 2023. 

The company also downgraded its estimates. It expects that its annual revenue will be between $11.5 billion and $11.6 billion, down from the previous guidance of between $11.7 billion and $11.8 billion. 

Ulta also lowered its margins estimates from between 14% and 14.3% to between 13.7% and 14%. Therefore, investors will focus on whether the company is working to improve its margins and supercharge its growth.

Ulta Beauty’s recent challenges have left behind a highly undervalued company. Its non-GAAP P/E ratio stands at 12.93, down from the sector median of 14.25 and lower than its five-year average of 21.12. 

Its GAAP PE ratio has moved to 12.9, lower than the sector average of 17.7 and the five-year average of 30. 

It is also highly undervalued in other areas as its EV to EBITDA has moved to 9.1, lower than the industry average of 10.8. 

Ulta Beauty stock price analysis

ULTA chart by TradingView

The weekly chart shows that the ULTA share price has been in a strong bearish trend in the past few years. This decline happened after the stock formed a double-top pattern at $557. In technical analysis, this pattern is one of the most bearish signs. 

The stock has now retested the neckline of this pattern at around $375 and there are signs that it could continue rising as investors buy the dip.

Ulta Beauty shares have moved below the 200-week and 50-week moving averages. Therefore, the stock will likely resume the downtrend after the Warren Buffett hype fades. The retreat will likely happen before or after its earnings report later this month.