Berkshire Hathaway (BRK-B, BRK-A) is investing in Ulta Beauty (ULTA).
On Wednesday, the Warren Buffett-led conglomerate disclosed in a regulatory filing that it bought 690,106 shares of the cosmetics retailer in the second quarter, valued at about $266 million at the end of June. Ulta shares rose more than 11 percent on Thursday and continued their rally on Friday, rising 14.6 percent since Berkshire disclosed its holdings.
The move is “a great sign of recognition,” Simeon Siegel, managing director and senior analyst at BMO Capital Markets, told Yahoo Finance. “The beauty category has always been an attractive category.”
In addition to its stake in Ulta, Berkshire Hathaway has expanded its holdings to include the aerospace company Heico (HEI) and sold its positions in Snowflake (SNOW) and Paramount (PARA). Berkshire has also reduced its stake in Apple (AAPL), among others.
Berkshire’s investment in Ulta came as a surprise, however. The stock has had a rough year so far, which may have made it more attractive in line with Buffett’s value-based investing philosophy. The retailer’s shares have fallen 23% since the beginning of the year.
“Warren Buffett is almost like the original value investor, and I think that’s how they saw it,” said Anthony Chukumba, managing director of Loop Capital Markets, who rates Ulta shares a buy. “We like the fact that Berkshire has taken a stake in the stock. That definitely lends credibility to the story.”
Ulta’s concerns about the slowdown
Ulta is one of the largest cosmetics retailers in the United States and plans to expand into Mexico in 2025. In the last quarter, the company increased its sales by 3.5% year-over-year to $2.7 billion, continuing the trend of strong growth and overall resilience in the cosmetics industry.
However, on April 2, Ulta Beauty CEO Dave Kimbell warned investors of “a slowdown across the category across all price points and segments.”
This triggered a sell-off in the stock, reflecting investor fears of declining sales and increased competition from Sephora and Amazon (AMZN), particularly in the higher-end beauty segment.
According to Chukumba, these concerns seem “exaggerated.”
“Ulta has a great model,” he continued. “They have a completely debt-free balance sheet. They generate a lot of free cash flow. They buy back stock pretty aggressively. I think they’ll introduce a dividend later this year, which will make the stock accessible to income investors as well.”
Siegel questioned whether Ulta was a healthy but mature company or whether it was saturated and could no longer sustain its growth story.
“Ulta and Sephora have revolutionized the way consumers shop for beauty products over the last 15 years,” Siegel said. “The company has dramatically taken market share away from department stores and displaced them in favor of beauty specialty retailers, particularly Ulta and Sephora. They have done a phenomenal job.”
However, “Ulta has now turned around or entered the next phase of its maturity,” Siegel continued. “It is no longer growing at the same level as before.”
He added that it was now up to management to prove to shareholders that the company could continue to grow.
In May, CEO Kimbell told shareholders, “I continue to have confidence in our differentiated model, the resilience of the beauty category and our ability to execute on our plans. However, we have adjusted our full-year guidance as we expect the momentum we faced in the first quarter to continue for the remainder of the year.”
Kimbell said the company will provide further details on its plan to drive long-term stock growth at its investor day in October.
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