Warren Buffett's recent investment in Ulta Beauty (NASDAQ:ULTA) may face a rocky start, according to analysts at Citi.
Despite the excitement surrounding Berkshire Hathaway (NYSE:BRKa)'s new stake in the beauty retailer, Citi anticipates that Ulta Beauty is likely to miss its earnings targets for the second quarter of 2024, citing several factors.
As a result, the firm opened a 90-day negative catalyst watch on the stock, lowering the price target to $375 from $400 a share. However, they maintained a Neutral rating on the stock.
Citi analysts expect Ulta to report weaker-than-expected second-quarter earnings, with an anticipated EPS miss when the company releases its results on August 29 after the close.
"We anticipate a 2Q EPS miss vs consensus driven by weaker comps and lower gross margin," Citi stated.
They project flat same-store sales (compared to the consensus expectation of a 1.4% increase) and a gross margin decline of 120 basis points, far worse than the 50 basis point decline anticipated by the market.
The analysts point to weakening trends in the beauty category and heightened competition as key challenges.
Specifically, they note the increased presence of Sephora in Kohl's (NYSE:KSS), Estée Lauder selling to Amazon (NASDAQ:AMZN), and Ulta's own partnership with Target (NYSE:TGT), which may be making it harder for Ulta to drive traffic.
To counter these headwinds, Citi believes that Ulta may have to increase promotional and marketing efforts in the second half of the year, which could further pressure margins.
The investment bank also forecasts that Ulta will lower its full-year guidance, with EPS expected to be revised down to approximately $24.50 from the previous range of $25.20 to $26.00.
Additionally, Citi expects the company to lower its long-term margin targets during its analyst day in October from the current 14-15% range to around 13%.