Ulta Beauty is in overdrive, and the high-growth retailer isn’t showing any signs of fatigue.
The beauty emporium is throttling ahead in its mission to reach 1,200 doors by 2019, and introduce the nameplate to more consumers across the country.
But Ulta isn’t simply a real estate story. Every new Ulta door added to the nearly 800-unit chain — and the curated assortment of mass, prestige and salon products and services within it — is helping Ulta narrow the gap with Sephora, the reigning leader of specialty beauty.
Ulta has worked to broaden its reach and relevance for some time, but chief executive officer Mary Dillon is stepping on the gas with a five-year growth plan intended to result in 500 new stores, an e-commerce operation that accounts for 10 percent of sales, and comparable sales growth of 5 to 7 percent a year.
In Dillon’s view, Ulta already garners allegiance from its current customers — after all, 80 percent of its sales come from its 15.5 million loyalty club members — but the concept is still unknown to many shoppers.
Dillon notes that Ulta currently has approximately a 3 percent share of the U.S. beauty market — and that there’s ample opportunity to grab more. Industry sources estimate that at its current growth rate Ulta could push its share to 6 percent over the next five years.
Nearly two years into her role as ceo, Dillon is getting high marks from Wall Street analysts, who nod to her visionary and analytical thinking.
William Blair analyst Daniel Hofkin said of Dillon, “She came in with fresh eyes and said, ‘How fast should we be growing? What is working and what is not?’ She’s very good at identifying what Ulta’s strengths are. She’s not trying to make sweeping changes for the sake of it.”
Dillon prefers to take a more evolutionary approach. “I am a big believer in testing and learning and not changing things too dramatically overnight. It’s too risky,” said Dillon. “If something is not broken I’ve learned not to go ahead and try to fix it. Let’s sit back and try to hypothesize about what areas will continue to make us stronger.”
Fortunately for Dillon and her team, that exercise is happening against the backdrop of good times for Ulta.
The retailer continues to grow at a staggering rate, achieving $3.24 billion in sales in 2014, or a 21.4 percent gain over the prior year. Its total same-store sales, which include its e-commerce site, gained 9.9 percent during the year.
Ulta’s first-quarter net income gained 34 percent to $66.9 million, or $1.04 a diluted share, compared with $50 million, or 77 cents, in the year-ago period. Sales for the three months ended May 2 gained 21.6 percent to $868.1 million from $713.8 million. Comparable sales increased 11.4 percent, driven by 7.2 percent growth in transactions and a 4.2 percent gain in average ticket size. Ulta — known for its democratic view of beauty that calls for merchandising mass and class under one roof — has steadily attracted prestige brands to the assortment. It’s a path first forged by former ceo Lyn Kirby, who wooed brands by knocking on doors and dramatically improving the in-store experience. Now Benefit Cosmetics boutiques are found in approximately 600 locations, and Lancôme and Clinique boutiques each occupy about 100 doors. The addition of these brands has helped fuel those double-digit sales gains, as prestige cosmetics and skin care lead the company’s growth.
Upon entering an Ulta store in Glendale, N.Y., visitors’ eyes are immediately drawn to other upscale brands, including Bare Escentuals — which offers brow shaping — Philosophy, and Dermalogica, which provides skin-care services.
While walking through the store here, Dillon emphasizes that mass brands, or what she called “accessible brands,” are also an essential part of Ulta’s positioning and competitive advantage.
“What we are all about is creating a differentiated environment, understanding the guest, where she shops and what she wants,” said Dillon. “We are always going to have competition, but nobody does what we do on the scale we do it. We’ve got all these categories, price points and services. It’s the notion of all things beauty in one place.”
When speaking about strategy, Dillon frequently refers to putting the customers — and the store associates — at the center of Ulta’s decision-making.
“The guest insight is really driving our model and the way we think about categories, products and services. We are very focused on a [consumer] segment that we call the beauty enthusiast,” said Dillon. “She’s somebody who absolutely loves to shop for beauty. She likes to curate her own look, and walk across the store and pick from lots of great categories and brands. When she wants assistance she can get it, but sometimes she doesn’t. For her it is absolutely critical that she can pick up a Maybelline product, an Urban Decay product and a Murad product. She loves the notion of being able to put them all together.”
Dillon also is looking to exclusives to attract consumers.
“It’s a competitive marketplace and the more that we can be distinctive the better, and exclusivity helps with that,” said Dillon. “Almost within every brand we have exclusive stockkeeping units, especially around key holidays.”
Dillon’s focus on amplifying Ulta’s focus on the customer is winning her accolades from vendors.
Bare Escentuals has collaborated with the retailer to create a number of exclusives tailored to the Ulta consumer, using its customer relationship management data, or CRM. Some of the initiatives born out of that collaboration include lifestyle kits centered around key moments, such as a birthday or wedding.
“It feels like we are having more of these roundtable, strategic discussions,” said Bare Escentuals ceo Simon Cowell. “[Mary’s] brought a strategic vision. She has a strong brand and marketing background and most importantly she has a great passion for the guest.” He added that Dillon — who prior to Ulta was ceo at U.S. Cellular and held marketing posts at McDonald’s Corp. and PepsiCo Inc. — has a natural curiosity about the business. He recalled that shortly after she arrived at Ulta, she visited Bare Escentuals headquarters in San Francisco and spent the entire day with Cowell and his team as he took her through the company’s history. She then used these types of meetings to help inform her vision for Ulta, said Cowell. “Something has kind of shifted at Ulta. It’s asking what’s next for Bare Escentuals and how can Ulta amplify that? It’s thinking in a more visionary way.”
Another key area of focus for Dillon is Ulta’s marketing approach, particularly as it expands into new markets. Ads now have a more emotional message rather than a singular focus on product and price. To that end, it began testing the “Go Ahead, Lose Yourself” campaign last September. The effort is designed to position Ulta as a playful escape.
She recruited David Kimbell — a former colleague at U.S. Cellular — as chief marketing officer in February 2014 and then expanded his role to chief merchandising and marketing officer earlier this year.
“Ulta has done a whole lot of things well, but it hadn’t invested enough in building the Ulta Beauty brand,” said Kimbell. “We have a great story to tell, but we hadn’t been telling that story in a big enough way.”
Kimbell said Dillon could see the marketing opportunity before she walked in the door. The pair also worked together at PepsiCo., and Kimbell joined Ulta to work with her once more.
Ulta has since dialed up its efforts to communicate its positioning of “All things beauty in one place” across TV, print, radio and digital.
Its also stepped up its outreach to bloggers, and now features Ulta “haul videos” on its Web site. Alongside each video, customers can click and buy.
“She wants to appeal to customers on an emotional basis. It’s storytelling, which hasn’t been done before [at Ulta],” said Cowen and Co. analyst Oliver Chen.
Part of Ulta’s stepped-up marketing effort includes its Ultamate Rewards loyalty program. The retailer recently migrated all program members to one platform and invited its sales associates to join so they can better explain the benefits to consumers.
“The way it works is the more you spend, the more points you get, and our guests love that simplicity,” said Dillon. “But behind that, we have the ability to use good, keen consumer insights to partner with our vendors and say, ‘How can we help you understand how to grow your brand.’ And for our guest, she gets more personalized offers.”
Dillon said one of the most surprising findings gleaned from the data is that only 7 percent of its loyalty card members have visited the salon at Ulta.
“So now that we know only 7 percent of our guests have tried our salon, you can imagine what a great opportunity that is for us.”