By  on November 13, 2009

A decade ago, Lyn Kirby boldly wrote prestige cosmetics into her business plan for the mass market emporium, Ulta Salon, Cosmetics & Fragrance Inc.

At the time, the incoming president and chief executive officer was so certain she’d be able to attract the department store elite that in 2000, she began building Ulta stores bigger to accommodate them.

Ulta’s initial public offering two years ago, followed by the unraveling of the global economy, has prompted upper-crust beauty firms to take notice of the superstore-turned-specialty concept, which houses salon, mass market and upscale brands under one roof.

“We always were building the store bigger than what we needed,” said Kirby. “When we began the journey 10 years ago, a 7,500-square-foot store — the size of our original store — was not going to be big enough to house this strategy.”

The Romeoville, Ill.-based retailer began building 10,000-square-foot stores with the unwavering belief that eventually it would need the space to accommodate prestige brands.

As Ulta began upgrading stores across the 333-unit chain — placing the cash register in the center to distinguish itself from drugstores — Kirby began what would prove to be an ongoing effort to sell upscale brands on the hybrid retail concept.

By the time of the chain’s IPO in October 2007, Ulta had a teeming assortment of prestige fragrances and a smattering of upscale cosmetics lines, including Bare Escentuals, Smashbox, Urban Decay, Bourjois and Elizabeth Arden. In the years since, Ulta has attracted Benefit Cosmetics, Korres, Cargo, Napoleon Perdis and fragrance and bath items from Philosophy, to name a few. In a coup for the retailer, Ulta linked arms with the Estée Lauder Cos. Inc.-owned brand Clinique. As of last month, Ulta had rolled out Clinique to seven stores in a limited store test.

Ricardo Quintero, senior vice president and general manager of Clinique, the Americas, referred to the program at Ulta as “a small test.”

“We are always testing and trying to learn new things,” said Quintero. “This project with Ulta is part of that philosophy. Ulta offers a lot of convenience and one-stop shopping.” Quintero would not comment on the brand’s mix at Ulta, except to say, “We feel that we have the right assortment.” He did note that Clinique’s boutique display at Ulta will incorporate the “grab-and-go” express service installed at its newly revamped Bloomingdale’s 59th Street counter.

Kirby declared, “The proposition of having mass market, professional hair and salon and prestige [beauty brands] under one roof still remains valid. It’s almost even more valid in the economic environment we find ourselves in.”

She added, “We have worked more aggressively to get some new brands in the store in keeping with our strategy to get more department store brands.”

To nudge these brands along, Ulta drafted blueprints to add 200-square-foot boutiques — like Clinique’s — to its store format. Kirby estimates the current store format, its Level Seven prototype, can house five boutiques. “I’d love to have so many [prestige] brands interested that I’d have to build a 12,000-square-foot store,” said Kirby.

More than 200 doors house a Bare Escentuals boutique and 40 stores contain both Bare Escentuals and Benefit Cosmetics boutiques. Benefit boutiques are found in a total of 80 doors. Philosophy is sold in some 246 Ulta stores in its own-brand shop.

Makeup artist Napoleon Perdis, who began distributing his namesake cosmetics range in Ulta in August 2008, said the retailer reflects how the consumer is shopping for beauty. “The marketplace is a combination of high-low. Ulta cherry-picks brands across [all tiers],” he said, referring to the mix of mass market and upscale brands. Perdis’ eye shadow quad sells for $35; nail polish, for $10. “It’s not an intimidating experience. You cannot alienate a woman when it comes to beauty, regardless of how much she is willing to spend,” said Perdis.

While higher-priced brands would push up the retailer’s average ticket, the impact of upscale lines is not built into Ulta’s sales expectations, said William Blair analyst Dan Hofkin.

Ulta has seen the average sales ticket decline, primarily due to the slowdown in fragrance sales, salon services and premium-price hair dryers and styling tools. It’s a trend Kirby doesn’t anticipate will change until the economy does. “We thought the opportunity was not to try and change the reality of the economy, but instead to drive traffic into the store,” said Kirby, noting that, in the latest two quarters, Ulta has done just that by “sharpening the pencil” on promotional newspaper inserts. One effort to boost foot traffic included offering the hair-smoothing Keratin treatment — normally a $250 salon service — for a six-week introductory price of $175, beginning Oct. 1.

For the first half of this year, Ulta’s net sales gained 11 percent to $542.4 million, from $488.4 million. Same-store sales for the first six months decreased 2 percent, compared with an increase of 3.8 percent in the year-earlier period.

The recession may attract department store brands, but it also has caused the company to adjust its approach to business.

Kirby and her team have responded by slowing Ulta’s expansion rate to 11 percent square-footage growth this year, from a rapid clip of 20 to 25 percent. Ulta maintains a long-term goal of growing into a 1,000-store chain, in 2008 opening 60 doors, and 35 this year. “We are stilling eyeing [1,000], but at a slightly different rate. There is nothing in this environment, nor in our store openings, that changes our point of view on that,” said Kirby. “Our model is dependent on the quality of real estate. As we begin to see quality real estate emerge, we will return to the sort of rates we were at.”

For Ulta, a typical new store generates sales of $2.6 million on average in the first year, generally ramping up to more than $4 million annually in five years. Ulta has maintained that same first-year volume in the first six months of this year.

Kirby acknowledged the pullback has given Ulta breathing room to deal with some issues that were on deck, including reducing expenses — the company is on track to cut spending by $18 million this year — and improving cash flow.

“They are permanent fundamental changes in the business that will continue to be permanent long-term strategies,” said Kirby.

Referring to efforts to drive store traffic, she said: “We had to move to these strategies overnight, but I don’t think the strategies we are employing will change overnight. It will be a far more gradual exit. If we do get some more of the [prestige] brands that we’d like we want to continue to have value as an important leg of our store. In this environment, I wouldn’t want to leave those customers stranded or disenfranchised.”

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