Buffett’s Sudden Ulta Exit: A Bold Move or Concerned Retreat?
Warren Buffett’s Berkshire Hathaway has shifted gears just a quarter after investing over $266 million in Ulta Beauty (NASDAQ: ULTA) stock, selling off more than 95% of its shares in the third quarter of this year.
This unexpected decision raises eyebrows among Buffett followers. Known for his long-term investing approach, Buffett famously stated, “Our favorite holding period is forever.” He has kept major investments, such as Coca-Cola, American Express, and Moody’s, for decades.
The reasons behind Berkshire’s quick exit from Ulta remain unclear. To assess whether selling the stock might be wise, let’s examine the beauty retailer’s current standing.
Image source: Getty Images.
Ulta’s Recent Struggles
Although Ulta has been a strong performer historically, it now faces challenges. The company is dealing with slowed sales growth, driven by weaker consumer spending and heightened competition. Following a reduction in guidance earlier this spring, the stock has fallen into a value range that initially caught Buffett’s attention.
Currently, Ulta’s price-to-earnings ratio is under 15, a favorable rate considering its return of over 1,100% since its IPO in 2007.
After the pandemic, sales surged alongside the broader cosmetics industry as consumers returned to social activities and workplaces. However, this year has seen a slowdown as beauty trends stabilize. Projections indicate industry sales will revert to low to mid-single-digit growth rates reminiscent of the 2010s.
In its second-quarter earnings report, ending August 3, Ulta recorded a 1.2% decrease in comparable-store sales, with total revenue rising just 1% to $2.55 billion. Profits dropped as gross margins fell from 39.3% to 38.3%, while selling, general, and administrative expenses climbed from $600.7 million to $644.8 million—making up 25.3% of revenue compared to 23.7% prior. Consequently, operational margins slipped from 15.5% to 12.9%, and earnings per share (EPS) decreased from $6.02 to $5.30.
To Sell or Not to Sell Ulta Stock?
Given the figures, Ulta is indeed facing difficulties, citing increased competition from over 1,000 new distribution points in the last three years.
Nevertheless, management hosted an Investor Day conference last month, detailing long-term targets and strategies. The vision includes expanding from over 1,400 stores to more than 1,800 and hitting 50 million loyalty members by 2028, up from 43.9 million at the end of Q2.
They also outlined financial goals for 2026 and beyond, targeting 4% to 6% revenue growth and low-double-digit EPS growth. Achieving these goals relies on enhancing product offerings, customer experiences, and loyalty initiatives.
Despite recent setbacks, Ulta retains several competitive advantages: its large retail spaces serve as beauty superstores, foot traffic is buoyed by in-store salons, it boasts a loyalty program with over 40 million members, and features around 800 outlets within Target stores. These factors suggest that recovery may still be on the horizon.
The company’s current valuation seems appealing, especially if Ulta can regain double-digit EPS growth. While Berkshire’s action raises flags, it is not necessarily a reason to sell. Clear signs of recovery would strengthen the case for buying, but current results may indicate a bottoming out.
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American Express is a partner of Motley Fool Money. Jeremy Bowman holds stocks in Target. The Motley Fool is invested in and recommends Berkshire Hathaway, Moody’s, Target, and Ulta Beauty. The Motley Fool’s disclosure policy is available upon request.
The views expressed are those of the author and do not reflect the opinions of Nasdaq, Inc.
