Ulta's stock slump after disappointing earnings is a buying opportunity, analysts say

By Ciara Linnane

Investors, who now include Warren Buffett, should buy the dip

The selloff in Ulta Beauty Inc.'s shares after the company's weaker-than-expected second-quarter earnings is a buying opportunity for investors, who now include Warren Buffett, investment banking firm D.A. Davidson said Friday.

Buffett's Berkshire Hathaway (BRK.B) surprised the market earlier this month when it revealed it had amassed 690,000 shares of the beauty company (ULTA) as of the end of second quarter in a bet it would soon retake its leading position in the category.

Ulta's once high-flying stock is down 25% in the year to date and is down 2% in the first half hour of trade Friday. The stock has been hit by a shift in competitive dynamics in the beauty space with rival Sephora, which has opened about 1,000 "store within a store" concepts at Kohl's Corp (KSS). locations.

Kohl's said this week the Sephora at Kohl's outlets increased sales by about 45% in the second quarter with same-store sales up by a low teens percent.

"Looking ahead, based on the timing of Sephora's rollout in Kohl's, we think ULTA's prestige share should start to rebound," D.A. Davidson analyst Michael Baker wrote in a note to clients on Friday. "Therefore, we see the latest pullback as a buying opportunity for this "Best-of-Breed Bison" name, particularly for longer term investors like Mr. B."

D.A. Davidson's "Best-of-Breed Bison" list is modeled on Buffett's philosophies as analysts identify companies with sustainable business models.

Meanwhile, Jefferies Group analysts, who have a hold rating on Ulta's stock, said the deterioration in trends through the second quarter has convinced them the new guidance for the year is "realistic vs. conservative" and said competition and market share pressure will keep them sidelined.

Analysts led by Ashley Helgans lowered their stock price target to $350 from $357.

"Beauty points of distribution have increased significantly, with more than a thousand new distribution points opening in the last two years," the analysts wrote. "Management reported 80% of fleet is impacted by at least one store in their trade area, and more than half of stores impacted by multiple competitive openings."

The competition is likely to intensify as Walmart Inc. (WMT) launches its own premium beauty marketplace, said Jefferies. The retail giant said earlier this week it is adding premium beauty products to its Marketplace assortment, starting with 20 new brands of skin care, hair care and hair tool products.

Ulta increased promotions in the second quarter and is likely to have to stick with them through the rest of the year, given the competitive pressures, said Jefferies.

"In our view, a prestige brand refresh is needed, as many of the legacy prestige brands Ulta carries have added new distribution points in e-commerce and off price," said the note.

Stifel analysts, who also have a hold rating on Ulta's stock, said they expect the company to scale back the pace of new store openings and to update longer-term operating margin targets at an investor meeting planned for October.

"Taken together, we think ULTA shares are likely to remain range-bound nearer-term pending improving category and company sales and sharetrends," analysts led by Mark Astrachan said in a note.

Stifel lowered its stock price target to $385 from $475 and lowered its fiscal 2025 sales and EPS estimates.

CFRA also stuck with a hold rating on the stock and lowered its price target to $374 from $441.

-Ciara Linnane

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08-30-24 1002ET

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