Buffet Reduces His Shares in Ulta Beauty's Stock Portfolio. An Opportune Moment for Stock Diversion?
Just a brief stint.
Not even three months have passed since Berkshire Hathaway, led by Warren Buffett, purchased over $266 million worth of Ulta Beauty (ULTA 0.16%) shares. Surprisingly, the investment giant offloaded an overwhelming majority of its stake in the third quarter of this year, selling off more than 95% of its shares.
This action caught the attention of those who keep tabs on Buffett's investment decisions. Known as a long-term investor, Buffett once famously said, "Our favorite holding period is forever" when the right conditions are met. He has been known to hold onto stocks for decades, including companies like Coca-Cola, American Express, and Moody's.
The reasoning behind Berkshire's decision to sell its Ulta shares remains unclear. With that in mind, let's take a closer look at Ulta to determine if selling the stock would be advantageous for investors.
Ulta's Challenges
While Ulta has had a successful run on the stock market in the long term, the company has experienced challenges in recent times. Slowing sales growth and increased competition have taken their toll, leading to a decrease in the company's market value. These factors may have been the reasons why Buffett's investment company took an interest in Ulta in the first place.
Currently, Ulta trades at a price-to-earnings ratio of less than 15. Given its impressive returns of over 1,100% since its initial public offering in 2007, this is an impressive deal for investors.
The pandemic saw a boom in the cosmetics industry, as activities like nightlife and office work resumed and resulted in increased spending on cosmetics. However, sales have slowed down this year, as the beauty industry returns to its normal growth rate of low to mid-single-digits, which it saw during the 2010s.
In its report for the second quarter, which ended on Aug. 3, Ulta reported a decline in comparable store sales of 1.2%, and overall revenue rose only 1% to $2.55 billion. Profits also took a hit, with gross margin falling from 39.3% to 38.3% and selling, general, and administrative expenses increasing from 23.7% to 25.3% of revenue. This resulted in a decrease in operating margin from 15.5% to 12.9% and earnings per share falling from $6.02 to $5.30.
Should You Consider Selling Ulta Stock?
Based on the figures above, it is clear that Ulta is facing challenges. However, the company has also noted an escalation of competition in the industry, with "more than 1,000 new points of distribution [opening] in the last three years."
Despite its recent performance, Ulta still has several competitive advantages, such as its large retail stores, salons, a loyalty program with over 40 million members, and its locations inside Target stores. With a promising strategy and attractive valuation, it seems that Ulta is poised to recover in the long term.
The valuation is particularly appealing at the moment, especially if Ulta can return to double-digit EPS growth as planned. Despite Berkshire's decision to sell its shares, there may not be a compelling reason to sell the stock. However, it would be prudent to observe further signs of improvement before considering a buy.
Given Berkshire Hathaway's decision to sell a significant portion of its Ulta Beauty shares, investors might question if this is a signal to follow suit. However, as a financially savvy investor might consider, Berkshire's selling could be based on short-term market conditions rather than long-term fundamentals. Ulta's competitive advantages, such as its large retail stores, salons, loyalty program, and strategic partnerships, may still make it an attractive investment option for those with a long-term perspective on finance and money.
