Ulta outlook cheery heading into holidays

By Antea Gatalica

As many brick-and-mortar stores have been losing momentum to online retailers, Ulta Salon, Cosmetics & Fragrance Inc. is bucking the trend.

The company continues to open new stores – it’s planning to open 100 in the coming year – and has raised its profit outlook after beating Wall Street estimates for sales and profit in the latest quarter.

Analysts say much of the credit goes to Mary Dillon, CEO of the Oakbrook-based beauty retailer since 2013. Under Dillon, Ulta has enhanced its guest loyalty program, developed in-store experiences, such as hair, eyebrow and makeup services, and grown e-commerce and digital marketing strategies.

“How we bring it all together is what sets us apart and what’s driving our consistent market share gains,” Dillon said Dec. 3 on a conference call with analysts, following the release of earnings for the quarter ended Oct. 31.

Ulta competes with shops like Sephora, which carries high-end beauty products, and Walgreens, which carries mass beauty products, but it is the only beauty chain that carries both.

Shares of the company have risen 45 percent over the past year, closing Tuesday at $185.08. Since Dillon’s arrival a little over two years ago, the shares are up over 47 percent.

That compares with a virtually unchanged Standard & Poor’s 500 index over the same period and a 26 percent median decline in shares of all specialty retailers, according to Bloomberg data.

Brian Yarbrough, analyst at Edward Jones, said Dillon’s arrival at Ulta changed the entire landscape of the retailer’s traditional strategy, specifically noting efforts to advance employee training and the company’s loyalty program, and ridding the stores of “gimmicky promotions.”

The company now has 17 million active members in its “Ultamate” loyalty program, up nearly 20 percent from a year ago, Dillon said. That follows 16 percent growth in loyalty program members the previous year.

Dave Kimbell, Ulta’s chief merchandising and marketing officer, said the company has implemented a variety of training programs for employees that are key to the guest experience in its stores.

“In the second quarter of this year, we continued to enhance training with our salon associates to train them [in] the new Fall and Winter trends developed in partnership with Redken. This included product recommendations and technical instruction for how to get the various styles,” Kimbell said in an email.

During the Dec. 3 conference call, Dillon said the strongest category during the quarter was hair color, blow outs, hair treatments and make up services, which she said reflected increased integration of hair and makeup looks in Ulta’s training and marketing materials.

Dillon’s ambitions come at a time when many stores are closing their brick-and-mortar doors and expanding into e-commerce, such as Macy’s, which announced plans to close up to 40 stores in early 2016.

According to Shoppertrak, a retail analytics provider, this year’s Black Friday weekend sales hit approximately $20.43 billion, an estimated 10.4 percent decrease compared to the year ago period.

At the same time, total online sales on Cyber Monday rose 16 percent to $3.07 billion, according to the Adobe’s Digital Index.

But if Ulta’s latest quarterly report is any indication, shoppers frequent its stores.

For the quarter ended Oct. 31, Ulta reported a 22 percent increase in net sales to $910.7 million, compared with $745.7 million, in the year ago period.

Net income also rose 22 percent to $72.1 million, or $1.11 per diluted share, compared with $59.1 million, or 91 cents, a year ago. Earnings per share beat the analysts’ consensus estimate of $1.05.

[field name=”Ulta Quarterly Net Income”]

Ulta quarterly earnings have grown year-over-year, with analysts estimating another increase in Q4 2016 (Bloomberg, Antea Gatalica/Medill).

Ulta gives consumers the ability to mix and match products, giving someone a much more personalized experience, according to Stephanie Wissink, analyst at Piper Jaffray & Co.

While Ulta focuses on the customer experience in its stores, it is also fine-tuning its digital marketing, with apparent success.

Ulta.com reported a 56 percent growth in sales in the quarter, which Kimbell attributed to the team’s more targeted online and mobile marketing strategies.

The primary goal of the digital strategy is to connect with millennials, a trend in the beauty industry. The motivation is “their ability to influence” and “resource information through friends in social media,” Wissink said.

Wissink said while e-commerce is a growing component of the business, it is not necessarily meant to be a transactional outlet for consumers. The company will more likely be investing in the website’s interface, looking to engage customers with tutorial videos or linking to blogs, and “inspiring someone to buy something.”

Other e-commerce retailers, such as Amazon, are not a major threat to Ulta, Wissink believes. Because of the ability to curate and personalize, Ulta will remain a first-stop shop for beauty consumers.

“As long as the beauty industry is about test-and-trial, Ulta has an advantage over e-commerce. Once you open it and use it it’s very hard to return beauty products,” she said.

While Ulta’s ambition fuels the company’s models for success, Kimbell said the retailer maintains awareness of growing competition.

“It’s pretty clear that the space continues to be crowded with competitors that are trying to improve their offering in the beauty category… That just means we have to up our game too,” Kimbell said.

The leadership team at Ulta, under Dillon’s guidance, will push forward in opening more traditional stores.

“Our strategic five-year plan includes growing our stores to 1,200 full-sized stores by 2019, which is about 100 new stores a year,” Kimbell said.

Approximately 25 percent of these will be in new markets and 75 percent will be in existing markets. About half the stores will be in new or redeveloped shopping centers.

Currently, Ulta operates more than 800 retail stores across 48 states.

To be sure, not every Ulta shopper likes the changes that have occurred under Dillon.

Mary Anne Glowacki, 57, said while she enjoys shopping at Ulta because of the loyalty program, she believes coupons and promotions are not as good as they used to be.

“[The employees] are usually helpful if I ask about something. I feel that [the company] could improve by bringing back the 20% off everything mailer that they sent to loyal customers just around the holidays,” Glowacki said in an email interview.

When asked about her in-store customer experience at Ulta, Meghan Powers, 26, said she is sometimes confused by whether the employees have a rounded knowledge of all the products.

“Usually the sales associates are very friendly and helpful. [But] sometimes I feel like they are selling me only one makeup line,” said Powers.

The state of the economy also impacts retailing. Consumer sentiment took a hit in November amid job worries and jitters ahead of the U.S. Federal Reserve’s expected interest rate hike this month.

But even if the U.S. economy slows, analysts say Ulta can ride it out. Wissink, said cosmetics are usually the last discretionary item that women eliminate.

“It’s largely a staple for women. It’s like telling someone not to buy a gallon of milk,” Wissink said.

Photo at top: Ulta plans to build out 100 traditional brick-and-mortar stores per year over the course of the next five years. (Antea Gatalica/Medill)