Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=108789
Story Retrieval Date: 5/18/2013 8:24:23 PM CST
Newly-public Ulta Salon, Cosmetics & Fragrance Inc., based in suburban Bolingbrook, this fall opened the doors of its newest and largest, 18,000-square-foot store at 114 S. State St. in the Loop and plans to continue its recent rapid expansion, despite the economic malaise burdening the country and most of the retail industry.
“Our store expansion is integral to our strategy and importantly, our new stores are delivering to our expectations despite the difficult economy, said CEO and President Lyn Kirby.
Ulta isn't feeling the credit crunch as badly as other retailers because of its cash and a $200 million credit facility, which the company has been expanding for the past few years, according to Chief Financial Officer Gregg Bodnar.
“We are in a very fortunate position, given the economic environment that we’re in, to be able to continue the growth ahead,” said Bodnar.
“Ulta will be self-funding in the next year and a half,” said Daniel Hofkin, chief financial analyst at William Blair & Co. “If there is any doubt that profitability will decrease, it can trim the store growth plans in 2009 and slow expansion in 2010.”
Current economic troubles have not cut into the expansion plans yet, but analysts at William Blair have shaved some of their estimates for Ulta after seeing the generally soft retail sales earlier this fall. Earnings per share for the fiscal year ending in January have been trimmed by a penny to 52 cents and by three cents in 2009 to 64 cents.
According to a report by William Blair, Ulta’s long-term earnings per share are expected to grow by 25 percent, which is the highest percentage of predicted growth among the major health and beauty and specialty retailers. Among estimates for 13 companies, including CVS Caremark Corp., Walgreen Co., Sally Beauty Holdings Inc., and Starbucks Corp., only Urban Outfitters Inc. and Zumiez Inc. are expected to have similar growth.
The State Street store is fast-growing Ulta’s 32nd in Illinois, and 308th nationwide, but the first in an urban location. The goal is to have 1000 stores across the country by 2017, Kirby said. Plans are underway to open 63 more stores and to complete eight remodels by the end of the year.
The State Street superstore, with four levels including a mezzanine, looks like a cosmetic candy store for women, offering 21,000 beauty products. The wide variety of brands of lipsticks, eye shadows and foundations fill the pristine white shelves and glass display cases on the first floor. Ulta seems to pride itself on its ability to cater to every woman. Its Web site declares that the store is an “affordable indulgence to its customers by combining the product of breadth, value and convenience of a beauty store with the distinctive environment and experience of a specialty retailer.”
Alexandria Littleton, of Chicago, said she started shopping at Ulta as soon as it came to her home town in Michigan in the winter of 2007.
“It’s like Sally’s and Macy’s had a baby. It’s upscale and relatively inexpensive. It’s rare that you find such a huge beauty store,” she said.
“It’s one-stop shopping,” said Evelyn Russell, who was accompanying her 23-year-old daughter to Ulta’s grand opening. “I work close by so I can stop in for anything I need. I will definitely be coming back.”
While Kirby argues that the store is designed for every woman, she does acknowledged that the average client has a salary of at least $75,000. She also admits that every client, regardless of income, has been cutting.
So Ulta’s promotional activity is expected to increase to cope with slumping consumer confidence and a weak economy.
“The cadence [of promotions and events] will vary dramatically as we respond to the economic trends in the marketplace,” said Kirby. We have a very flexible and robust marketing strategy in this company. We go to market to our customer club members 15 times a year and to newspaper inserts about 15 times a year. And we keep that very, very close to when we go to market so we are able to respond to trends very quickly.”
While Kirby recognizes the strain the economy is having on customers, the company has seen remarkable growth – 34 consecutive quarters of rising comparable-store sales. In the second quarter ended Aug. 2, total revenues were up 24 percent to $249 million from $200 million in the year-earlier period.
Net income for the quarter increased 67 percent to $3.7 million, or 6 cents per diluted share, from $2.2 million or 4 cents per diluted share last year. The earnings were above analysts’ estimate by 1 cent per diluted share.
The company predicts net sales for this quarter in the range of $258 million to $262 million compared with actual year-ago third quarter sales of $208 million. Earnings are expected to fall between 8 cents and 10 cents per diluted share. In 2007, third quarter earnings were 8 cents per diluted share.
For the six-month period, net sales rose 23 percent to $488.4 million with comparable store sales increasing 3.8 percent.
For full-year 2008, the company estimates net sales in the range of $1.12 billion to $1.13 billion compared with $912 million last year.
Ulta’s strong second quarter performance is indicative of long-lasting success even though, Hofkin of William Blair warns that the subsequent quarters in the retail industry aren’t going to be great.
“I would expect Ulta to fare considerably better than average given that they have significant assortment of mass brands that are priced competitively with Target and below the drugstores, but the business is not as robust as it was a year or two ago,” he said.
Ulta manufactures its own products and it carries a host of other name-brands including Burberry, The Beat, Vera Wang, Flower Princess and Ed Hardy, which were all launched last quarter. In total Ulta carries more than 500 brands across color, skin, fragrance, hair and styling tools.
Ulta was founded 18 years ago in Romeoville, Ill. by Terry Hanson and Dick George. Last October Ulta stock started trading on the Nasdaq market, with an initial public offering at $33 a share. In the IPO Ulta sold 7.6 million shares of common stock, which resulted in net proceeds of $123.5 million.
Ulta stock closed Wednesday at $6.77, up 50 cents but far from the 52-week high of $28.85. The 52-week low is $5.63.
William Blair's Hofkin sounds a note of caution. “The company has only been public for a year, so anytime there is heightened risk aversion, people have an even smaller appetite generally for newer stocks just because they are perceived as more risky. I think people are probably just a little apprehensive about how resilient the business will be,” he said.