ULTA BEAUTY (ULTA STOCK) 2Q'24 RESULTS! WARREN BUFFETT BUYING VALUE STOCK?

Ulta beauty stock Ula is down around 3 to 4% today following their second quarter results and cutting their ful year outlook to around $24 per share in earnings notable value investor Warren Buffett happy birthday Mr Buffett if you're tuning in to the unrivaled channel uh he was a noted buyer of Ulta in the past quarter it's a tiny position for him but it is interesting to see that he seen value in it perhaps because the stock has roughly gone nowhere for The Last 5 Years you know roughly break even over the Last 5 Years despite the fact that the underlying fundamentals have continued to improve you can see how yes there was a covid impact where you know folks said hey I don't need to wear as much makeup maybe I'm going to use a uh Instagram filter instead or something like that and use a little AI to look a little bit better uh but outside of that you do have this sort of steady March in terms of cosmetics and Wall Street was expecting continued growth in the years ahead and you know looking at the free cash flow profile pretty similar you know you do get some lumpiness but overall you're talking about a business generating around a billion dollars plus in free cash flow per year looking at the business itself you're talking about a brand Ulta beauty that has around 1,400 retail stores across the United States uh carrying around 25,000 different products different brands stock keeping units so you have these big stores 10,000 square feet carrying a lot of different brands and you can see most of their sales are tied to Cosmetics that's 40% plus of their revenue another 19% is skincare another 19% is hair care so you can see quickly these top three represent the line share of this business you do have additional Services Salon type services but this is the small fraction of the total when you're looking at the big picture thinking about this business it is interesting to see that they've been steadily adding new stores each year so suggesting that hey you know they're still filling out their footprint you know a couple percent more each year now it's around 1,400 so I I wanted to know you know has management indicated how many stores they can open up over time you know this is something that they might mention in one random transcript or sometime in the last few years do they have a long-term goal also is international expansion another potential driver so this is just something I quickly want to know I personally use AI ticker chat I'm one of the co-founders and chatting now is completely free so feel free to check that out if you're interested so this is an example of chatting about Ulta Beauty and the answer is that yes you know and you I can go to the source documents if I'm interested but yes management has effectively said 1,500 to 1700 uh freestanding locations in the US so versus the 1400 base you know you're talking about 10 20% potential growth there but they're also talking about expanding into Mexico over time so that could help accelerate their growth but looking at their second quarter results I'd say broadly kind of stinky you know net sales increased 0.9% investors clearly were expecting more comp sales so this is talking about the you know effectively their mature store base as well as their e-commerce sales that actually decreased investors don't like to see that uh this was driven by a nearly 2% decrease in transactions this means shoppers are effectively purchasing less and a 0.6% increase in average ticket this has been a trend that you've now seen with a few different uh retailers where they sort of have this challenge of look we need to raise prices to deal with inflation but as you raise prices ultimately do have the effect that the consumer their wallet hasn't caught up and so you know they they can't buy as much uh luxury goods and this has been a key aspect that management actually calls out on the call not only the challenge consumer and you've seen that with with um sort of lower tier you know stores like Dollar General recently which also you know the stock fell something like 30% this past week so you're you're seeing that dynamic in retail broadly this inflation you know sort of squishing the consumer and making it tougher for the retailers uh to prosper and so you see gross margins okay so they're passing on inflation But ultimately you have lower merchandise margins so their gross margins decline but then you look you still have to play pay your you know your your rent you still have to pay your general admin expenses you know the Salesforce and so as a result you know your your cost as a percentage of Revenue increased because you know the sales aren't growing enough and their margins are declining and so looking at this you know you're looking at their profitability their operating income dropping to around 133% Net of sales versus closer to 16% last year a sizable drop in earnings per share so this is why you're seeing this Outlook cut for the year for this is why the stock is down and management gave a bunch of reasons why and so once again going to AI Chiago in the most recent quarter list the reasons that their results stunk and you know these are just the top couple which is that that that management called out which is growth is normalizing after three years of significant gains they're talking about increasing competitive intensity among the beauty categor so that's a direct quote and this is important to call out because that's that's always something you want to dig further into if management talking about you know like increased competitive intensity does that mean you're potentially losing market share to someone else and during the call management effectively said look there's a couple of different tiers within Beauty there's sort of the highend and then there's Mass Appeal and they're suggesting that they are losing share in some of these categories I believe some of the higher end tiers but sort of mass they're holding on so you know that does reflect look competition is a real thing that means it's not you in my mind I want this sort of the unrivaled story where it's very very clear this is how you're going to win over time and this is this makes the story harder ultimately when you're saying hey competition is is sort of eating your lunch but I will talk about just a second what is Buffett see or what is his lieutenants at Burkshire hathway see I believe maybe it's Todd Colmes uh C in this another excuse that management called out for why their results stunk during the quarter seeing an earnings decline was they had a disruption from their Erp so that's their enterprise resource planning system which led to disruptions in their store inventory allocation so that impacted sales they also talked about how there and this is you know if I were to keep going through this list uh you know management talked about their their marketing plans didn't quite work out and didn't have the uplift that they expected okay so what are my thoughts on Ulta uh first of all in full disclosure this is not Financial advice also a quick plug recently Robin a premium member of unravel investing commented this is a direct quote I'm an extremely happy customer of unrivaled the information Services you provide to are invaluable this follows another subscriber posting on how and this is another direct quote I'm currently ahead of my investing goals to retire at age 45 thanks to unrivaled if you're looking for compelling investment ideas come check out unrivaled investing so thinking about Warren Buffett and Berkshire hathway and his lieutenants buying starting to buy a steak in Ulta it's this is a classic Warren Buffett checklist maybe I'll make a whole separate video on effectively the two types of Warren Buffett checklists that are out there in my mind uh that he's publicly called out if if that would be helpful for you let me know and I'll uh I'll consider making that video um but this is you know this is a classic type of setup cheap predictable and being able to pencil out a reasonable return over time and by Cheap you know you could see even though they've cut this Outlook from 11 and a half 11.6 billion in sales to closer to 11 billion comparable store sales going from low single digits to Flat maybe slight decline uh you know they've kept most of their projection the same except you know earnings are taking a bit of a haircut from $26 per share to $23 a share so you you know you are talking about relatively cheap you know around 13- 15 times EPs and personally when I'm looking at something like this what I personally want to do is I always try to size up management and ideally I have Founders that's you know you're not going to have that case here uh so if you don't have the founders you're going to say hey is all this Capital getting returned to me is it management extremely shareholder friendly and so far their policies do seem to be friendly where they're just buying back tons of stock uh you know they talked about how share repurchases around $1 billion I already called out they're already doing around a billion dollars on free cash flow so you know that means the vast majority of the free cash flows going to shareholders reducing the shares outstanding and you know if you think this the shares are cheap at 13 to 15 times which Buffett does uh you know then it's it's a nice way of reducing the share count by a couple percent each year and the logic is fairly simple simple you know if you if you let's say let's say it's at 15 times going forward valuation doesn't expand you know at 15 times if they take all their free cash flow and buyback stock one divided by 15 you're talking about around 7% buyback per year ballpark so then if you overlay that with the fundamental growth of the business so you say hey what do I think net earnings could do over time and let's say you layer on maybe another 5% long-term potential growth that's you know talk about their store base talk about inflation talk about new products talk about uh Mexico expansion so you consider that that 5% plus the financial engineering of share repurchases and now you're talking about a teens type of return over time low teens not High Teens but low teens type of return over time so you know you could start to see how you know a value investor like Warren Buffett could say okay you know like I I get this you know this is this is the this is why I want to buy it now keep in mind Buffett has like nearly a $300 billion cash stockpile he's been selling his Apple he's been selling his Bank of America so if he wanted to buy all of Ulta it' be it would be easy for him he could buy it with the interest alone over time if he wanted to uh but this is you know I I I sort of view this as a uh he enjoys the game his lieutenants enjoy the game and it's just like okay I'll put on a small you know a side bet you know um in terms of following this may maybe we make a little bit of money maybe make you know 10 to 15% type of returns over time in theory so so first is cheap you can get that second is predictable women love makeup I think that's not contr I I I hope hopefully I don't get canceled for saying something like that um but yes women women generally love makeup it's it's how they stand out uh often times you know showing off their features you know and and you want to uh look good as you can tell I I wear a lot of makeup no I I do not wear any makeup um but you can see looking at their historic results that even during the Great financial crisis this was a growth story growing at least 10% per year and I think that's important to to say just because that reflects the durability the predictability of this business that said at that time it was that growth story because they could continue to open up new stores that's much less now because as Management's called out they're closer to that ceiling in terms of what they could do with us the question is can you start let's say evolving with the riskier international expansion maybe they can deliver on that um so you know we'll see the the big decline was in response to covid where people were using more of those AI filters uh hey I don't need it I'm I'm going to be on Zoom type of thing looking at the return framework this is using AI ticker chat in the predict feature and you know this is ai ai is saying hey this is based on reading the transcripts based on reading you know based on what it knows about the industry what management has said it's effectively saying low teens margins you know singled digigit type of growth over time and maybe you get to a market multiple give or take in the next five years in which case you're talking about nearly 100 to 200% return overtime plus the cash and I already called out that around 7% cash that goes to you each year and so if you factor that in even in the downside where the price doesn't increase that much uh you are going to benefit because this cash is in theory going to go to you um and that could help juice the return so this is I think why Buffett is is buying this you know is BU has has bought a little bit of Ulta stock personally I think these assumptions are a little too um in some cases a little too aggressive so I'm going to tweak it myself and so I'm going to put in my own assumptions of only two to four only 2 to 6% Revenue growth compounded over time 13 to 15% margins and I'm going to do a Tighter and lower valuation range maybe I'm just more conservative maybe that's just my take and I'm sort of getting close sort of break even and then you know getting some upside of around 100% it does get better when you factor in the cash flow that can go to shareholders so it wouldn't surprise me if Ulta works well over time I personally given that the fundamental growth isn't really jumping out and you're seeing that with negative comps I personally am in the camp that these types of stories especially with retail you know who knows if you get a type of recession type of thing you know if you have something like that you know could you just get a crazy cheap valuation so that's sort of my mentality that said it would not surprise me if Ulta does outperform the markets over time you know when you have this sort of framework I just personally like I'm so let's say Ulta is growing you know very slowly maybe you can pencil out 5% growth over time uh and it trades around 15 times well just this past week in my life I called out a company that's effectively at 15 times and growing closer to 20 to 30% a year so obviously like that math is much more compelling long term obviously different types of risks but you know that's why every investor has a different different Journey you know they figure out what's comfortable for them what they're looking for anywh who I hope this video calling out Ulta has been helpful for you talk about UL stock why it's down why buff it might in theory be buying it and if so please make a point of hitting that Thumbs Up Hit That subscribe button if you found this video to be helpful thanks so much for watching unrivaled investing