Why Does Ulta Soar While Others Crash?

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Why Does Ulta Soar While Others Crash?

By Tim Denman - 09/13/2017

Ulta Beauty continues to see sales soar and customer engagement increase at a phenomenal rate as the cosmetics retailer stakes its claim as the leader in the space.

In Q2 2017, Ulta enjoyed 20% topline growth, with sales growing to $1.2 billion lead by an 11.7% comp sales bump and a host of new store openings. The retailer continues to invest in service and technology both in-store and out, leading to growth in nearly every measurable metric and a growing shopper base that seemingly cannot get enough of the brand.

“Our rapid share gains show that our guests love Ulta Beauty,” said Ulta CEO Mary Dillon on a recent earnings call with analysts. “But we don't rest on our laurels. We all know that shopping behaviors and expectations consumers have for retail are evolving rapidly. 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.

Below is a quick update on five key growth areas Dillon discussed that are helping Ulta set the pace in the beauty and cosmetics space.

Omnichannel

The cosmetics retailer is enjoying continued success both in-store and out and is dedicated to growing its omnichannel customer base. Currently, omnichannel customers make up 8.8% of the retailer’s loyalty members, up from 7.3% a year ago. Ulta’s omnichannel shoppers spend more than double the typical physical-only shopper and make a purchase 9.5 times per year, compared to just four times for physical only shoppers.

“We continue to make progress with our omnichannel roadmap,” Dillon said. “Currently we're testing the ability to order from ulta.com in-store and deliver to the guests home if there were any products that were not available when she visited our store. This program which we call store-to-door is being tested at 40 stores and we're working on deploying other projects to strengthen our omnichannel capabilities.”

While Ulta’s omnichannel business continues to show solid incremental growth, its e-commerce business is growing at an astronomical rate. Digital traffic increased 73% overall in Q2 2017, with mobile growing an astonishing 104%. Dillion said the exceptional growth is thanks to investments in digital marketing, paid search, affiliate display retargeting, and social media investments.

In addition, the retailer continues to update and enhance its mobile apps, which have been downloaded over 4 million times, and seen traffic increase 450% year-over-year with 41 million visits in Q2 alone.

While its digital initiatives are a major growth area for the brand, Ulta’s bread and butter continues to be its physical store experience. To meet growing demand Ulta opened 20 new stores in Q2, brining its total to 1,010, and remains on pace to open 100 net new stores in 2017.

Supply Chain

Ulta continues to scale up its supply chain capabilities to keep pace with new store opening and booming digital sales. The retailer recently opened two new DCs in Dallas, TX and Greenwood, IN. The retailer has quickly transitioned its e-commerce business to the new fulfillment centers, with 80% of digital orders fulfilled out of the new locations.

“Our DCs processed significantly more e-commerce shipments than forecasted during the quarter while improving productivity, decreasing cost per shipment and keeping labor costs in-line with forecasts,” Dillion said.

In addition, Ulta has broken ground on another distribution center in Fresno, CA. The site is on track to open by mid-2018. The 670,000-square-foor fulfillment center will be able to service up to 400 stores and process 45,000 e-com orders per day.

Loyalty and Consumer Recruitment

While Ulta is currently enjoying a major financial boom, the executive team knows that success today is no guarantee of success tomorrow and continues to innovate and improve the customer experience to solidify its market-leading position. A key aspect of its forward-facing strategy is the continued growth of its popular loyalty program and shopper recruitment efforts.

“Our loyalty program continues to represent one of our most valuable assets,” said Dillon. “As of the end of July ultimate rewards grew to 25.4 million active members, up 23% year-over-year driven by merchandising and marketing efforts and excellent in-store conversion. Our share of the beauty enthusiast market has increased to 27% with plenty of opportunity remaining to attract more members. Retention rates, sales per member, frequency of purchase and average member ticket are all strong and stable.”

In addition to catering to existing clients through its loyalty program, Ulta is casting a wide recruitment net by launching a grocery store gift card program. The program allows grocers like Albertsons, Safeway and Publix to sell Ulta gift cards. By the end of the third quarter, the cards should be in 22 different retail chains and 12,000 individual stores ― just in time for the end-of-the-year gifting rush.

Services

The lion’s share of Ulta’s 20% topline growth is occurring at the store level, both in net new stores and booming established locations. Consumers are flocking to Ulta for its unique assortment of top brands and an engaging in-store experience highlighted by its thriving salon business.

Ulta’s salon business grew 15.3% in Q2, right on pace with the 16% year-over-year growth the service has seen over the past 12 months. In the quarter, the in-store salons completed more than 1.4 million service experience, a 13% bump year-over-year.

“We have a thriving salon business that drives meaningful differentiation versus a brick-and-mortar retailer,” Dillon said. “Less than 6% of our guests currently use our salon but they are our best guests spending nearly three times more than non-salon shoppers. We've developed deep consumer insights and hypothesis about how to innovate even further in the salon industry.”

Ulta is wasting no time putting this customer insight into the field, launching a large-scale pilot of an improved salon business model based on guest behavior and preferences. The new model features a simplified menu, a more transparent pricing model, and increased training for stylists.

Products

While intuitive mobile apps and in-store salons are great and certainly help to bolster the bottom line, the key to Ulta’s success remains its differentiated assortment.

“Our unique assortment continues to drive market share gains across the board,” said Dillon. “We've rolled out about 400 of the 700 prestige boutiques featuring Lancome, Clinique, Benefit and MAC in our plan this year. We've launched about 600 MAC SKUs online in early May and currently have 60 stores rolled out with plans to build more than 100 MAC boutiques by year-end. Initial results have been excellent with MAC quickly becoming the number one or number two brand where its launched.

In addition to the in-demand product assortment, the MAC boutiques are staffed with highly trained associates that provide makeup services.