Warren Buffett’s latest investment in Ulta Beauty (NASDAQ:) could get off to a rocky start, according to analysts at Citi.
Despite the excitement surrounding Berkshire Hathaway’s (NYSE:) new stake in the beauty retailer, Citi expects Ulta Beauty to likely miss its Q2 2024 earnings targets, citing several factors.
As a result, the company opened a 90-day negative watch period on the stock and lowered its price target to $375 from $400 per share. However, it maintained a neutral rating on the stock.
Citi analysts expect Alta to post weaker-than-expected second-quarter earnings, with earnings per share expected to decline when the company reports its results on Aug. 29 after the close.
“We expect second-quarter earnings per share to be below expectations due to weak comparables and lower gross margin,” Citigroup said.
They expect same-store sales to be flat (compared to the consensus forecast of a 1.4% increase) and gross margin to decline by 120 basis points, much worse than the 50 basis point decline the market had expected.
Analysts point to weak trends in the beauty category and increasing competition as major challenges.
Specifically, they note Sephora’s increased presence at Kohl’s (NYSE:), Estée Lauder’s sale to Amazon (NASDAQ:), and Ulta’s partnership with Target, which could make it harder for Ulta to drive traffic.
To counter these headwinds, Citi believes Alta may have to increase its promotional and marketing efforts in the second half of the year, which could put further pressure on margins.
The investment bank also expects Ulta to cut its full-year guidance, with earnings per share expected to be lowered to around $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 October analyst day from the current range of 14-15% to around 13%.