Buffett’s new stock pick could miss earnings: Citi By Investing.com

Warren Buffett’s recent investment in Ulta Beauty (NASDAQ: ) could be off to a rough start, according to analysts at Citi.

Despite the excitement surrounding Berkshire Hathaway’s (NYSE: ) 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 monitor on the stock, lowering its 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 earnings in the second quarter, with an anticipated EPS miss when the company reports its results on Aug. 29 after the close.

“We expect second-quarter EPS to miss consensus, driven by weaker compensation and lower gross margin,” Citi said.

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, much worse than the 50 basis point decline expected by the market.

Analysts point to declining trends in the beauty category and increased competition as key challenges.

Specifically, they note Sephora’s increased presence at Kohl’s (NYSE: ), Estée Lauder sales to Amazon (NASDAQ: ) and Ulta’s own partnership with Target, which could make it harder for Ulta to drive traffic.

To counter these headwinds, Citi believes Ulta may need to ramp up promotional and marketing efforts in the second half of the year, which could further squeeze margins.

The investment bank also expects Ulta to cut its full-year guidance, with EPS revised down to around $24.50 from a 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 range of 14-15% to around 13%.