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Beauty Retailers Put the Brakes on Store Openings

The turbulent economy has uprooted expansion plans for a host of beauty retailers, like Ulta and Walgreens.

Inside Ulta's newly opened Chicago store.

The turbulent economy has uprooted expansion plans for a host of beauty retailers.

From boutiques to drugstore chains, purveyors of cosmetics have entered the new year with scaled-back store-opening programs, marking an about-face from the aggressive expansion plans announced over the last several years. Bluemercury, Ulta and Walgreens are among the retailers that have slowed square footage growth this year.

“We’re seeing single brand [stores] expanding instead of beauty emporiums,” said Faith Hope Consolo, chairman of the retail leasing and sales division of the real estate firm Prudential Douglas Elliman. Her beauty clients have included Fresh, Lancôme, Clarins and Bare Escentuals. But for companies on the hunt for real estate, deals are abundant. “The landlords are in a listening mood, which is very different than last year,” said Consolo. “They are willing to negotiate.” She added that the departure of a number of banks and apparel retailers have left prime vacancies along coveted main streets and in malls.

Marla Malcolm Beck, founder of the Washington-based beauty apothecary Bluemercury, said the 26-store retailer intends to take advantage of opportunistic real estate deals. However, Beck said Bluemercury will slow its growth rate to 10 stores this year, down from its previous target pace of 30 new units a year. Bluemercury had planned to reach a door count of 300 by next year.

Ulta, the Romeoville, Ill.-based beauty retailer, has also temporarily pulled back its new store growth rate until the economy rebounds.

Early last month, during the company’s most recent earnings call, Ulta’s president and chief executive officer, Lyn Kirby, told analysts, “We have reduced our new-store expansion pace in 2009, as we assess the changing real estate landscape. We also have adjusted our real estate strategy for 2009 to allow us to take advantage of attractive opportunities that we believe will present themselves after the holidays. Quite simply, we are controlling those elements of the business where we have direct influence and are outperforming most other retail operators.”

In a recent research report, Wachovia Capital Markets LLC analyst Jason Gere said of the pullback: “While the company is not abandoning its long-term business model for 20 to 25 percent square footage [growth], the reduction in fiscal 2009 to [a growth rate of] 15 to 20 percent allows management to be more prudent with its real estate strategy.”

Even the 6,500-plus-door Walgreens is no match for the persistent recession. Late last month, the drugstore chain said it will further reduce its organic (or nonacquisition-related) store openings to between 4 and 4.5 percent growth in 2010 and between 2.5 and 3 percent growth in 2011. The planned slowdown comes on the heels of an announcement in July to reduce organic store openings to 5 percent by 2011. The company said the lowered target rate will reduce capital expenditures through 2011 by an additional $500 million, on top of the $500 million in capital expenditure savings announced in July.

At the time of the announcement, Walgreens president and chief operating officer Gregory Wasson stated, “We believe that further slowing of organic growth is a prudent step in the context of the current economic conditions.” He added that the move will free up capital for other projects, including store remodels and the expansion of retail clinics.

Recession or not, CVS Pharmacy is charging ahead with plans to roll out its new upscale beauty concept called Beauty 360, which made its debut in the fall. The drugstore opened two Beauty 360 boutiques, located adjacent to CVS pharmacies, late last year, and a spokeswoman said the company still plans to open 50 additional units this year, with potential for 500 stores in the future.