Does the Oracle of Omaha’s endorsement make Ulta Beauty a buy right now?

Ulta Beauty (ULTA) stock catapulted 12% on Thursday as the market cheered the disclosure of Berkshire Hathaway‘s (BRK-A) (BRK-B) share stake in the beauty-products retailer.

Berkshire Hathaway, whose CEO is celebrity value investor Warren Buffett, purchased 690,000 Ulta Beauty shares at the end of 2024’s second quarter for a total value of around $266 million.

It’s not unusual for the market to celebrate a surprise purchase by Berkshire and Buffett, also known as the Oracle of Omaha. The sharp rally in Ulta Beauty stock shows how much trust is placed in Buffett’s judgment as a picker of value stocks.

“We view this development as a vote of confidence for the company’s longer-term prospects and a further validation of ULTA’s significantly discounted valuation,” wrote Oppenheimer analysts Rupesh Parikh and Erica Eiler.

Ulta Beauty is expected to release its second-quarter fiscal 2024 financial results later this month. The company has a highly consistent track record of beating Wall Street’s EPS expectations.

However, there are no guarantees, and investors should review the available facts to decide whether ULTA stock is a good Buffett-style value pick right now.

Analysis: Respectable results and the CEO’s warning

It’s been a while since Ulta Beauty released its first-quarter fiscal 2024 results. First, the company’s net sales grew 3.5% year over year to $2.73 billion. This is a respectable result, but nothing spectacular and certainly not a screaming “Buffett buy” so far.

Second, Ulta Beauty’s earnings declined from $6.88 per share in the year-earlier quarter to $6.47 per share in Q2 FY2024. This result beat Wall Street’s consensus call for earnings of $6.25 per share, but it’s still not encouraging to see Ulta Beauty fall short in terms of EPS growth.

The firm also lowered its net sales outlook range for fiscal 2024 from between $11.7 billion and $11.8 billion, to between $11.5 billion and $11.6 billion in the company’s Q2 FY2024 report. It’s not a sharp downward revision, but one can still wonder why Buffett would favor Ulta Beauty in 2024.

Then, there’s a warning that Ulta Beauty CEO Dave Kimbell issued in April. “Things that are going on in our consumers’ lives has led to a bit slower growth than we had anticipated in the category,” Kimbell cautioned.

Moreover, according to The Wall Street Journal, Kimbell stated that spending is weakening across the industry for all kinds of beauty products, no matter the price tag. Sure, that was back in April, but it’s still relevant.

Ulta Beauty is about to report its results for 2024’s second quarter, which wouldn’t include April since the company’s first fiscal quarter ended on May 4. Still, realistically speaking, the weakening in consumers’ beauty-product spending wouldn’t have been immediately resolved in May, June and July.

The unspoken watchword here, of course, is inflation. Consumers aren’t necessarily going to splurge on beauty products if they’re prioritizing necessities like food, rent, and utilities.

Yet, perhaps Ulta Beauty can right-price its products to fit cash-strapped customers’ budgets. In fact, according to Jane Hali & Associates analyst Jessica Ramirez in an interview given to the Wall Street Journal, the beauty firm stands out due to its “varied beauty assortment that taps into all price points”.

Waiting is the smart move

So, maybe that’s what Buffett likes about Ulta Beauty. When consumers’ dollars are stretched, they can still indulge in small luxuries such as cosmetics.

Nevertheless, Ulta Beauty is about to release fresh financial results and until then, it’s difficult to know whether the company successfully appealed to cost-conscious consumers in fiscal Q2.

Therefore, even while Buffett and Berkshire Hathaway evidently see a good value in Ulta Beauty stock, it’s wise to wait for more information to be released before making any moves with your investable capital.

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