Ulta 'Playing Offense' Amid Speculation About Amazon Incursion

The retailer of "all things beauty" posted Q2 net sales growth in excess of 20% to $1.29bn. Rumors have been swirling about a possible luxury beauty play from Amazon, but Ulta management is undaunted, telling investors, “We have no blinders on, and we're playing offense.”

Ulta Beauty, Inc. has been booking double-digit comparable sales growth on a quarterly basis since December 2014 and remains confident that beauty enthusiasts have made their home at the specialty retailer's e-commerce site and its more than 1,000 stores across the US.

Reported Aug. 24, Ulta's fiscal 2017 second quarter was another for competing retailers to envy, with comparable sales (those for stores open at least 14 months and e-commerce) up 11.7% and net sales up 20.6% to $1.29bn overall.

Execs attributed the continuing strong performance to sales channel shifts within the industry as a whole and Ulta's unique business model, which has allowed the retailer to capitalize on changing consumer habits.

The company's highly incentivizing customer loyalty program, supply chain investments to speed e-commerce delivery, thriving in-store salon business and growing assortment of in-store prestige boutiques are fueling growth and attracting new customers, including highly coveted teens, millennials and Latinas.

At the same time, the company's stock has plunged in recent months to May 2016 levels after steady six-month growth that reached a high of around $311 at the start of June. As of market close Aug. 30, it was trading at around $214, a decline of approximately 30% versus peak performance.

Some investors view the sell-off as prudent, while others believe now is the time to scoop up shares at a discount – if not the steal represented by the sub-$100 price for Ulta shares three years ago.

Those in the former camp generally cite weakening US beauty trends and concerns about the activities of certain "folks in Seattle" – i.e., Amazon – a subject raised by analysts during Ulta's Q2 earnings call.

“We’ll cut right to the elephant in the room,” CEO Mary Dillon said during the call's Q&A portion. “We don’t have blinders on about this, but I would say that at the end of the day, it’s really about how we bring it all together."

She explained, "You can’t get this anywhere else – the categories, brands, price points, the experience in the store. … We really just play our offense.”

Concerns about the "Amazon effect" on cosmetic retailers spiked following WWD's unconfirmed report at the end of July that Amazon has entered into a deal with luxury beauty retailer Violet Grey.

Chief Merchandizing and Marketing Officer David Kimbell also emphasized Ulta's increasingly seamless integration of brick-and-mortar, digital and mobile as a key differentiating factor that resonates with today's beauty consumer.

In particular, he said "the physical experience, the human component to it, the idea of having a beauty destination that our beauty enthusiast guests can come in and touch and feel and smell and be immersed in beauty is exciting to her, and that's what she looks forward to when she comes to our stores."

Ulta opened 20 new stores in the second quarter, on track to hit its target of 100 new stores for the year. The new locations are exceeding sales expectations, according to Dillon.

Meanwhile, the retailer is building its digital and mobile platforms. Ulta.com sales soared 72.3% to $96.3m during the period, driven by a 104% increase in mobile traffic.

To maintain momentum in the digital sphere, Ulta is actively looking to add brands to its offering with strong engagement on social media, Dillon said, citing Morphe Cosmetics as an example. The makeup and brushes brand's roster of partner influencers includes Manny Mua and Jaclyn Hill, who boast more than 3m and 4m subscribers to their YouTube channels, respectively.

Morphe will be launching in Ulta stores and ulta.com in the third quarter, Dillon said.

Ulta has been teaming with beauty vloggers itself to promote its own line of beauty products, recently introducing a makeup palette with YouTube star Melisa Michelle (576,000+ subscribers), which has been well received, according to the exec.

Rumors Drive 'Amazon Effect' Fears

Concerns about the "Amazon effect" on cosmetic retailers spiked following an unconfirmed WWD report at the end of July. According to WWD's "multiple" unnamed sources, Amazon has entered into a deal with luxury beauty retailer Violet Grey that will give it access to brands such as La Mer, Tom Ford and Dior.

There's speculation that the e-commerce juggernaut (and new Whole Foods owner) could use the deal as a springboard into original content to engage beauty enthusiasts and route them to its online marketplace. Violet Grey's editorial content includes product reviews and "lessons" on hair volume, décolletage, sheer makeup and other topics.

Asked for assurance that Ulta will not be losing brands to heavyweights like Amazon, Dillon said the specialty retailer's partnerships are “stronger than ever" and downplayed concerns about brand overlap across the competing platforms.

She noted that Mario Badescu skin care, butter LONDON makeup and nail color, and Stila Cosmetics are sold by Amazon but are still “growing like crazy for us."

The exec added, "I can’t really speak on behalf of brands, but I generally think most prestige brands aren’t that interested in [Amazon]."

"We’re very focused on the beauty enthusiasts. We understand those guests better than anybody else." – Ulta CEO Dillon

Estee Lauder Companies, Inc. leadership recently told investors during a fourth-quarter earnings briefing that Amazon lacks the “high touch” services it looks for in distribution partners, so it has no plans to directly distribute any of its brands on the platform. (Also see "Lauder Prioritizes Digital Sales Without Diminishing In-Store Importance" - HBW Insight, 23 Aug, 2017.)

The firm's presence in Ulta and Sephora doors, on the other hand, has surged markedly over the past year. (Also see "Lauder Evolution: Distribution Shift All About Consumer Reach" - HBW Insight, 25 Aug, 2016.)

Ulta has rolled out 400 of 700 planned in-store prestige boutiques for four brands – L’Oreal S.A.’s Lancome, LVMH’s benefit and Lauder’s Clinique and MAC. As the most recent addition to Ulta's array of boutiques, MAC is now in 60 Ulta stores, with 40 more planned installments by year-end.

Lauder is looking to the boutiques to help MAC reach new target consumers, especially in smaller cities. Ulta execs said MAC is quickly becoming the No. 1 or No. 2 brand wherever it appears on Ulta's map due to the line's compelling assortment and the highly trained makeup artists MAC employs.

Ulta believes it's well-positioned to continue winning with the most passionate of beauty consumers. “We’re very focused on the beauty enthusiasts,” and “we understand those guests better than anybody else,” Dillon said.

She highlighted Ulta's Ultamate Rewards program, which incentivizes its customers to spend both in-store and online to score loyalty points, which then are trackable via Ulta's mobile app, downloaded to date by more than 4.4m users.

“Our beauty enthusiast guest is obsessed with newness, and the vast majority of our online purchases are items she hasn't purchased in the last 12 months,” the CEO said. “Her shopping behavior online is even more driven by exploration and newness than in-store, with very few repurchases of exact items in either channel.”

According to Ulta, membership in its loyalty program grew 23% year-over-year to 25.4 million active members at the end of July, with ample opportunity to grow that base.

'Realistic' Expectations For Long Term

CFO Scott Settersten told investors the Ulta's mantra is to be both optimistic and realistic about guidance. The retailer is projecting 9% to 11% comparable sales growth in the third quarter and growth of 7% to 9% in the longer term, he said.

“The overperformance we’ve seen here over the last two to three years – a lot of it has been the newness and how it’s performed way above expectations. You can’t continue to bat a thousand every quarter with new product roll-out,” Settersten said.

Still, the category is healthy and Ulta is "very optimistic," he said, with a strong pipeline of new offerings expected in the back half of the year.

Dillon specifically mentioned Lauder's Bumble and bumble hair-care line, which is in the process of rolling out to 500 Ulta stores and ulta.com, as well as CliniqueFit Workout Makeup, designed to capitalize on the athleisure trend.

She assured investors that Ulta does not take its success for granted. “We don't rest on our laurels. We all know that shopping behaviors and expectations consumers have for retail are evolving rapidly, and we've been on that from the start."

She continued, "Our business model today and our continued focus on innovation in the areas that are relevant and differentiating to our guests provide me with the utmost confidence in our ability to gain share across multiple categories for many years to come."