Warren Buffett Dumped This Stock Last Quarter. Should You Buy It Ahead of Earnings Thursday?

Warren Buffett is rightly called the greatest living investor. Since becoming CEO of Berkshire Hathaway (NYSE:BRK-A | BRK-A Price Prediction)(NYSE:BRK-B) in 1965, Buffett has generated cumulative returns 5,502,284%, a nearly 20% annual return, compared to 39,054% returns for the S&P 500, or 10.4% a year.

Although Buffett doesn’t beat the market every year, over six decades he has consistently surpassed the index and it’s why he is called the Oracle of Omaha. 

He’s achieved this astounding record by primarily buying great companies at discounted prices and then holding for the long term. As he once noted, “the best time to sell is never.”

Yet Buffett often sells stocks he owns. Sometimes he sells a little, other times a lot. And many times he completely closes out his position.

That happened with one stock in particular last year. Buffett made headlines in the first quarter of last year after buying more than 160,000 shares of Ulta Beauty (NASDAQ:ULTA) for $266 million. It wasn’t an especially large position for Berkshire Hathaway, less than 1% of the portfolio’s total, and it amounted to just 1.6% of ULTA stock.

However, just as abruptly, he sold 96% of his stake the very next quarter. By the fourth quarter, Buffett had sold off the rest of his position. Notably, over the last 12 months, Ulta Beauty has lost 35% of its value, making Buffett’s sales prescient, but also calling into question why he bought it in the first place.

With the cosmetics company poised to report fourth-quarter earnings on Thursday, March 13, after the market closes, should you buy the cosmetics company before it releases its financials?

Lipstick on a pig

The pandemic boom has given way to a more cautious consumer

Between the low part of the market’s crash during the pandemic until March 2024, Ulta Beauty had been on a dramatic run higher. It had outpaced the S&P 500 by more than two-to-one as its stock quadrupled in value. Then it all seems to come undone.

The beauty sector overall experienced a slowdown, with Ulta CEO Dave Kimbell warning investors there was reduced demand for beauty products. A tight economic environment, including inflation and changing consumer spending habits, caused shoppers to become cautious about spending on non-essential items like cosmetics.

The so-called Lipstick Effect never materialized for Ulta. It was a term coined by Estee Lauder‘s (NYSE:EL) Leonard Lauder during the market collapse brought on by the dot-com bubble and 9/11. Its premise is that beauty brands tend to perform better during times of trouble because consumers will continue buying small indulgences like lipstick even though they can’t afford to make bigger, more expensive purchases.

But the sales boom of the pandemic has given way to single-digit sales growth, declining operating income, and narrowing margins.

Attacked from all sides

Ulta Beauty operates over 1,400 stores in all 50 states, while pursuing omnichannel retailing and global expansion opportunities. While it reported higher sales in its fiscal third quarter, they were up just 1.7% on comparable store sales that managed to squeak higher 0.6%. Customers still frequent Ulta salons, but they’re not buying much or trading down to cheaper merchandise.

Competition is more intense, too. The prestige beauty segment saw 1,000 new points of distribution spring up over the past few years, according to CEO David Kimball, causing it to market share. Often one, sometimes multiple, new prestige competitors entered the market.

By improving its makeup and hair offerings, as well as fragrance and skincare, the cosmetics company was able to staunch the share losses. In Q3, Ulta kept its market share flat. It also regained customer traffic in the quarter, indicating the worst might be over.

Key takeaways

Wall Street has a consensus hold rating on ULTA stock, with a $459 per share one-year price target, implying 28% upside from current levels. Of the 30 analysts covering the beauty care company, they expect it to post earnings of $7.15 per share on $3.47 billion in revenue. That would be an 11.5% decline in profits on a 2.5% drop in sales from last year.

With much of the market in turmoil at the moment due to rising inflation, trade tensions from tariffs, and mass federal government layoffs, there is a lot of economic uncertainty.

While Ulta Beauty’s business may have stabilized, investors would do well to stay on the sidelines. As a long-term holding, ULTA stock is a solid business, but there may be opportunities to buy in at a better price.