Ulta Beauty (ULTA -0.91%) investors have some good reasons to feel disappointed right now. Their stock was left out of the 2024 rally, declining 13% through mid-December while the broader S&P 500 jumped 24%. Its slumping valuation even attracted attention from Warren Buffett's Berkshire Hathaway (BRK.A -0.39%) (BRK.B -0.56%), yet the famed investor went on to sell almost all of that new position by the following quarter.
It's possible Buffett and his investing partners soured on the economics of this spa and beauty products business, which has been struggling with weaker consumer spending trends for more than a year. Ulta stock also has a chance at rebounding if management's turnaround plan works out.
Let's take a look at which of these scenarios seems more likely for 2025 and beyond.
Things are still tough
Ulta is still suffering from many of the industry challenges that have hampered the business throughout 2024.
"The headwinds have not abated," CEO David Kimbell told investors in early December when Ulta announced its fiscal third-quarter earnings results. These pressures include weaker industry demand overall, plus more price cutting from rivals as competitors fight to win market share from increasingly price-sensitive consumers.
You can see the results of that tough market environment in Ulta's weaker operating metrics. Comparable-store sales (comps) are flat through the first three quarters of the year compared to a 7% increase in the prior-year period, and profitability is down. Earnings declined to $16.93 per share in those 39 weeks, down from $17.99 per share a year earlier.
The path forward
Yet there were some encouraging bright spots in the latest update from Ulta's management team. The retailer is staying solidly profitable despite the growth slowdown, and inventory levels are holding up well.
Ulta has a strong presence in mass market beauty products, which have become more competitive lately. But it also sells plenty of merchandise in the higher-priced, faster-growing market segments like luxury skin care.
Kimbell, in December's earnings report, called out the "ability to engage across all price points" as a competitive advantage for keeping customer traffic flowing through the holiday season and beyond. That's why Ulta actually upgraded important parts of its full-year outlook. The current forecast now calls for comps to land between flat and a 1% loss, up from the prior range of between flat and a 2% decline.
ULTA Operating Margin (TTM) data by YCharts
Operating profit margin got a similarly modest boost and now should reach between 12.9% of sales and 13.1% of sales for the year.
Ulta's stock in 2025
That update still suggests it will be some time before Ulta shareholders see anything approaching the 15.6% growth and the 16.1% operating income level that the company achieved in fiscal 2022. The prospect of two consecutive years of declining profit margin and a much slower expansion helps explain why many investors are sour on this stock as a new year approaches. And it implies there's a good chance the retailer will underperform the market again in 2025.
Yet that's no reason to abandon the stock. Ulta's operating trends are still beating many peers, after all, and it is profitable and generating plenty of cash. It's just that the beauty products industry is now a tougher place for all competitors lately and might remain so for much of the coming year.
Ulta's challenge is to continue to stand out from the many rivals hoping to establish a bigger foothold in the makeup and skincare arena. If it can do that without giving up too much profit margin, shareholders will be set for better long-term returns than they've seen in the past year.
