To The Moon

Warren Buffett just bought this stock. Cosmetic Company, $ulta beauty(ULTA)$ jumped 11% yesterday on news that Warren Buffett's business Burk Shear halfway had purchased almost 700,000 shares. What does Warren Buffett see in Ulta Beauty?

Financials

Cash: $525 million

debt: $0

Enterprise Value: $17.3 billion

Revenue TTM: $11.3 billion

Net income TTM: $1.26 billion

Adjusted EBITDA TTM: $1.94 billion

Free cash flow TTM: $914 million

Valuation

P/E Ratio: 14

EV/FCF: 19

EV/EBITDA: 8.9

That PE ratio is right at the bottom of the company's historical range. That low valuation is because Ulta is not performing as well as in the past.

Negatives

Same-store sales in the first quarter rose just 1. 6% year-over-year. Ulta then cut its full year outlook to just 2 to 3% growth. That guidance requires a significant Improvement in the second half of the year which isn't guaranteed. This kind of growth is much lower than investors have come to expect from Ulta. Before the pandemic, the company had an average revenue growth rate of almost 20%. One factor behind the decline is the rise of Sephora, which is owned by $LVMH-Moet Hennessy Louis Vuitton(LVMUY)$ . A partnership with department store $Kohl's(KSS)$ dramatically expanded Sephora's reach in the US to over a thousand stores. Even Ulta's CEO Dave Kimble said that the addition of so many points of distribution was unprecedented. Kohl's says that sales from Sephora shops rose 90% in 2023 to over $1.4 billion and expects more than 2 billion next year. Combine that with the performance of fast growing brand, $e.l.f. Beauty Inc.(ELF)$ and it's easy to see how Ulta has experienced pressure on sales. Despite the increasing competition, there's a chance the market is overreacting.

Positives

The cosmetics industry is a resilient and growing market and Ulta's profits are holding up reasonably well. Meanwhile, Kohl's expects to finish the year with just over 1,000 Sephora shops. Considering there are only 1,165 Kohl's in the US, the rapid growth in Sephora shops is set to slow down considerably from here, that should relieve some pressure on Ulta. Meanwhile, Ulta Beauty has a growing membership program and plans to expand into Mexico. Management also said that they're seeing promising signs from a move into the luxury category.

DCF Model

Assumptions:

Annual revenue growth rate: 10% for the next 10 years

FCF Margin: 9%

Discount rate: 10%

Terminal rate: 2.5%

Expected annualized return: 12.7%

Conclusion

That's not bad and it looks like Buffett bought the shares slightly higher than where they are now. There's still time to get in on this stock 

These are my personal opinions not financial advice and I hold no position in Ulta.