Ulta Beauty (NASDAQ: ULTA) stock shot up 20% last week when it was revealed that Warren Buffett's Berkshire Hathaway had taken a $315 million stake in the company.
Prior to that, Ulta stock was mired in a downfall that saw it shed 45% of its value since March — dropping from a 52-week high of $574 all the way down to a 52-week low of $318 on August 12.
So even with the Buffett bump, Ulta is still down substantially from its highs.
The decline was largely the result of shrinking margins, which are being squeezed by higher costs and more promotion.
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In March, Ulta projected a full-year profit margin of 14%–14.3%, which was down from 15% in 2023.The company lowered the forecast for a second time in May to a range of 13.7%–14%.
Worse, the company lowered its forecasts for net sales and earnings as well.
It also became clear that the higher promotional spend was driven by a growing sense of urgency surrounding Ulta's market share.
"We are not satisfied with our market share trends, and we are taking actions to reinforce our leadership position and accelerate growth," CEO Dave Kimbell said on Ulta's earnings call.
Kimbell further clarified later in the call, saying:
Today, there are significantly more places to buy beauty, especially prestige beauty, with more than 1,000 new points of distribution opened in the last two years. Additionally, prestige brands are expanding their online availability as digital penetration grows in the category. As a result, our market share has been more challenged for the last few quarters, particularly within the prestige beauty category.
The stiffer competition forced Ulta to raise its marketing investments across TV, audio, and social media platforms to goose traffic.
It's also adding 25 new brands this year and is now delivering products to its customers via DoorDash.
Buyers can now order products to be delivered from Ulta's 1,350 locations across the country and receive them in an hour or less.
So while Ulta is facing its share of headwinds, the company is working to right the ship.
Time will tell if it succeeds, but Warren Buffett is clearly a believer. And I get why.
Obviously, it's never a good sign when a company is losing market share and downgrading its forecasts. At the same time, though, a 45% drop in roughly four months seems a little excessive for a beauty retailer that's working to arrest its negative trends with increased promotion and partnerships.
Additionally, while Ulta has had to revise its guidance downward, the company still reported a 3.5% increase in net sales ($2.7 billion) and a 1.4% increase in gross profit ($1.07 billion).
The company also continues to add new stores, though not at the rate it had previously. There was a time when Ulta was adding roughly 100 stores every year, but that pace has since slowed to 30–50 in recent years.
However, the company still believes there's room for 1,500–1,700 locations in the U.S. That's important because the beauty segment is an area that still draws in a lot of in-person shoppers who want to experiment with different shades, brands, and fragrances.
Ulta also has a deal in place to expand into Mexico and is considering other foreign markets as well.
Of course, in terms of downside risk, there's no doubt that luxury cosmetics of the kind Ulta provides would be especially hard hit by a drop in consumer spending.
Barring that, though, Buffett's bet on Ulta stock makes sense as a value play. His investments always do. A return to $500 per share seems unlikely, but $400 is very reachable.
Ulta reports its second-quarter earnings on August 29.
Fight on,
Jason Simpkins
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