Buffett was disclosed bought Ultra Beauty stock in Q2 2024, first time ever.
Company Profile
Ulta Beauty (ticker: ULTA) is a large American cosmetics retailer.
Founder
Richard E. George, president of Osco Drug, Inc., resigned in 1989 and founded Ulta Beauty in 1990.
Main business
Founded in 1990, Ulta Beauty has always been a leading player in the U.S. beauty retail industry and is the largest beauty retailer in the United States. Ulta Beauty carries high-end and low-end cosmetics, fragrances, nail products, bath and body care, beauty tools and hair care products. The company has beauty salons open to the public at various retail locations.
IPO
The company was listed on the Nasdaq on October 25, 2007.
Operating status
Business scale
Ulta Beauty only operates in the domestic U.S. market. As of January 28, 2023, Ulta had approximately 1,355 stores in all 50 states, approximately 250 of which were located in Target stores.
Ulta Beauty offers high-end and cosmeceutical cosmetics, skin care products and fragrances in addition to its own brand of beauty products and fragrances. Ulta Beauty sells well-known cosmetics brands such as MAC Cosmetics, Kylie Cosmetics, Allure, and ColourPop.
2024 Q1 financial report
Ulta Beauty’s revenue in the first quarter of 2024 will increase by 3.5% year-on-year to US$2.73 billion, with sales increasing by 1.6% year-on-year. As of the first quarter of fiscal 2024, the company’s number of operating stores reached 1,395.
Competitors
Traditional cosmetics giants
Lancôme(ticker: ELF), Estee Lauder(ticker: EL), Coty (ticker: COTY), and Louis Vuitton’s (ticker: LVMUY) chain cosmetics store Sephora (SEPHORA), the three traditional cosmetics giants, are Ulta Beauty’s natural competitors.
Emerging online rivals
Including emerging online rivals E.L.F.(ticker: ELF), and Amazon(ticker: AMZN).
Large shopping malls
Macy’s (ticker: M), Kohl’s (ticker: KSS), Nordstrom (ticker: JWN), these traditional large shopping malls, because their stores have traditional shopping traffic and crowds, are also Ulta Beauty’s opponent.
Possible reasons that Buffett bought
Stock price plunge arouses Buffett’s interest
In the second quarter of 2024, Berkshire revealed that it had opened a position of 690,100 shares of Ulta Beauty for the first time, with a market value of approximately US$266 million. Data show that since mid-March 2024, Ulta Beauty has continued to decline, falling 45% from its high point. After Buffett was revealed to hold the company’s stock, the market immediately surged 14% the next day after hearing about Buffett’s position.
In line with Buffett’s stock preferences
Buffett’s investment strategy generally favors companies with competitive advantages, good management teams and reasonable valuations, and Ulta Beauty fits those criteria. Based on my previous research, Buffett’s portfolios all have some commonalities. For details, please refer to the special analysis of my two previous posts:
- “The commonalities of Buffett portfolio – cheap, fixed income, repurchase“
- “Common creteria when Buffett pick up stocks“
Probable Reasons
- Cheap stock price: Ulta Beauty’s stock price has fallen to its lowest level in years. The current price-to-earnings ratio of 12.56 times is relatively low, which meets Buffett’s stock acquisition standards. From a value investor’s perspective, based on the price-to-earnings ratio, the stock’s valuation is at its lowest point in a long time.
- Shareholders reward programs: The company announced a US$2 billion stock repurchase plan in March this year, with US$1.8 billion remaining as of early May. The company may start paying dividends this year.
- Competitive: The number of company members increased from 6 million in 2007 to 44.2 million last year, and the member consumption ratio increased from nearly 50% to over 95%. Ulta Beauty operates in an industry driven by rational competition, and its executives are known for their ability to manage capital.
Risks
Beauty industry suffers headwinds
The growth of the beauty market since 2024 is not optimistic. Ulta Beauty said in April 2024 that both the mass market and luxury markets were slowing down. The company also lowered its sales guidance for this fiscal year after its first-quarter financial report, predicting sales growth of 2% to 3%, lower than the previous forecast of 4% to 5%. L’Oreal also lowered its sales guidance from 5% to 4.5% to 5%. %.
The company is going downhill
The rise of the Internet, social networks, celebrity effects, including emerging online rivals E.L.F., and online retailers such as Amazon, have been putting tremendous pressure on Ulta Beauty’s business growth. Such an irreversible trend is indeed reflected in the company’s financial reports in recent years, especially the downward trend of the company’s stock price in recent years.
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- “Why Buffett bought Ultra Beauty, the largest beauty retailer in the U.S.?“
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- “The commonalities of Buffett portfolio – cheap, fixed income, repurchase“
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