Things haven’t been particularly sunny in the retail industry lately. But Ulta Beauty — a mecca of cosmetics and haircare that is storming America’s strip malls — has been a rare exception.
The chain has consistently rung up strong sales growth and is rapidly adding new stores, even as other retailers are closing doors amid the rise of online shopping. It added 24 locations in the second quarter alone.
On Thursday, the company put on an even prettier face: Executives told investors it was raising its sales and earnings forecasts and said that it believes there is greater appetite for its stores than previously thought. Ulta projects comparable sales — a measure of sales online and at stores open more than a year — to rise a whopping 12 to 14 percent for the full year. That kind of growth is practically unheard of in today’s retailing environment. The company also said it now believes there is a market for 1,700 Ulta stores in the United States, a bump up from the 1,400 stores it had previously thought were sustainable. Investors on Thursday sent the stock soaring more than 11 percent after the upbeat forecast.
So how does Ulta plan to keep up its momentum? Executives said they will be doubling down on their efforts to court “beauty enthusiasts,” or especially heavy buyers who constantly experiment with new products. In a company video presentation for investors, a voice-over said of this shopper: “If she could date beauty, she would.”
Ulta already attracts plenty of these obsessives: Its latest customer research found some 77 percent of Ulta shoppers own more than 11 lipsticks, and 68 percent own more than two curling irons. But the company believes there are about 72 million women who fit this customer profile, and only about 15 million of them currently shop at Ulta. Crucially, Ulta estimates “beauty enthusiasts” account for 77 percent of the spending in the beauty business.
Essentially, this means the company will not be gunning hard for the so-called “replenishment” shopper, the type who has been using the same face wash since high school and only hits the store when she runs out. In other words, theirs is not a game of simply getting the widest possible audience, its about hooking a specific subset of big spenders.
That, will mean continuing to persuade more brands, especially upscale ones, to sell on their shelves. Even for shoppers who can’t afford Shiseido skin care or Nars blush, those products give an important halo of luxury to a place that also sells wallet-friendly brands such as NYX.
The chain will also make a major push in the year ahead to pull down more money from the salon services it offers in its stores, including haircuts, color, and blowouts. Currently, those services account for just 5 percent of revenue, and they could be key in driving traffic and incremental sales: A customer who comes six times a year for her haircut might start buying her cosmetics and haircare products there because it’s convenient to do it in one fell swoop.
The services push will show up in other ways, too: It has redesigned some stores so that the “brow bar” — a place for eyebrow shaping — is front and center to better catch customers’ attention.
Ulta’s explosive growth should have both department stores and drugstores worried. In their presentation to investors, executives said their customer often starts out buying only lower-priced, mass-market products — but she gradually starts buying more on the more expensive items known in industry jargon as “prestige” products. Five years in, Ulta says its shoppers tend to divide their spending roughly equally between prestige and mass products. Translation: The chain threatens beauty sellers across the price spectrum.
Ulta’s strong performance and forecast offer some reasons for optimism for the broader slate of traditional retailers trying to navigate today’s shopping landscape. For example, the company said Thursday only 6 percent of its business comes from the Web, and it only expects that to rise to 10 percent by 2020. That is a strong demonstration of the potency of brick-and-mortar stores, even at a moment when more shoppers are flocking to digital channels.
And its booming sales also suggest that women are, in fact, willing to splurge when they find a product especially enticing. Some retail executives have tried to explain away disappointing sales results by saying that shoppers are choosing to shell out for experiences such as travel instead of buying goods. Ulta’s success — and the strength throughout the broader beauty industry — suggests that, even given those changing shopping patterns, retailers can get people to spend on indulgent goods if the products are enticing enough.