Warren Buffett's new holding, beauty retailer ULTA, reported unfavorable financial results, causing the stock price to drop more than 8% after hours | Financial Report Insights

Beauty retailer Ulta Beauty (ULTA) missed expectations across the board in the second quarter. This marks the first time since May 2020 that Ulta has missed earnings per share expectations and the first time since December 2020 that it has missed revenue expectations. Additionally, following a recent decline in same-store sales, the company has lowered its full-year performance outlook.

On Thursday, August 29th, after the U.S. stock market closed, Ulta Beauty released its financial data for the second fiscal quarter ending August 3, 2024.

1) Key Financial Data:

EPS: Earnings per share of $5.30, analyst expectations were $5.50. Net profit was $252.6 million. In the same period last year, earnings per share were $6.02, with a net profit of $300.1 million.

Revenue: Revenue of $2.55 billion, analyst expectations were $2.62 billion, compared to $2.53 billion in the same period last year.

Same-Store Sales: Same-store sales declined by 1.2% in the second quarter, falling far short of the analyst's expected growth of 1.32%. In the same period last year, there was an 8% growth, which is a stark contrast to the 14.4% growth in 2022.

2) Performance Guidance:

EPS: The company now expects full-year earnings per share to be $25.2-26, lower than the previous forecast of $22.6-23.5.

Revenue: The company now expects full-year revenue to be $11-12 billion, down from the original forecast of $11.5-11.6 billion.

Same-Store Sales: The company now expects full-year same-store sales to decline by 2% to flat growth, compared to the previous forecast of 2-3% growth, while analysts expected a growth of 1.89%.

Ulta's stock rose by about 2.4% in early trading on Thursday and ended up slightly by 0.21%. After the earnings report was released, Ulta's stock price fell by over 8% at one point. Based on the post-market stock price on Thursday, Ulta's stock price has fallen by approximately 30% from the end of last year and about 40% from its historical high in March this year.

Ulta CEO Dave Kimbell stated:

While many positive indicators in our business are encouraging, our performance in the second quarter did not meet our expectations, primarily due to the decline in same-store sales. We are clear on the factors that have adversely affected the performance of our stores and are taking action to address these trends.

Warren Buffett's ULTA Holdings

The 13F filing released in mid-August showed that as of the end of the second quarter, Warren Buffett surprisingly took a position in a beauty stock - Ulta Beauty, buying approximately 690,000 shares worth around $266 million, accounting for 0.1% of his total holdings Buffett's new position in Ulta has attracted attention for two reasons: first, the timing of the new purchase coincides with Berkshire Hathaway's aggressive cutting of its other holdings, and second, Buffett has a wealth of experience in consumer stocks.

On the first trading day after Buffett disclosed his Ulta position, Ulta's stock price soared by over 11%, but in recent trading days, it has been fluctuating.

Since the company's CEO warned of a cooling demand for beauty products in April, Ulta's stock price has been declining. It was during the market's subdued sentiment in the second quarter that Buffett entered the market. Buffett has always focused on companies with a strong "moat", and Ulta's comprehensive product coverage and high customer loyalty may be the reasons for his investment. For more analysis, see the Wall Street Journal article "Why did Buffett choose the beauty newcomer Ulta?".

How does Wall Street view this?

Analysts are concerned about Ulta's performance as consumers become more cautious in their spending, competition intensifies, and retail theft remains a problem. CFRA analyst Ana Garcia said:

We believe that due to consumers' budgets remaining tight after two years of price increases, beauty demand may face pressure in 2024. We believe consumers will tend to shop before restocking, purchase innovative solutions, and take advantage of consumer rewards.

Anticipating Ulta's further downward revision of its performance expectations before announcing its financial report, UBS analyst Michael Lasser said:

Ulta's stock price still reflects too much negative sentiment about its long-term business growth and profit prospects. We do not believe that Ulta's model has inherent problems or structural disadvantages. It is digesting years of massive growth and increasingly fierce competition, including competition from online platforms such as Amazon and TikTok stores.

According to a report from the foot traffic analysis platform Placer.ai, Ulta's foot traffic growth remains extraordinary compared to other beauty and health industries.