Fast-growing beauty retailer seen as among the best in the business

BOLINGBROOK, Ill. — Ulta Beauty’s chief executive officer, Mary Dillon, has more to celebrate than the company’s 25th birthday.

The company is growing at a rate enviable in retailing today, and it is on virtually every beauty care brand’s wish list. The financial community considers Ulta Beauty and Dillon among the best in the business.

The company’s most recent quarterly results are a perfect example of the success story Ulta Beauty has become. Sales for the second quarter, ended August 1, expanded 19.4% to $877 million from $734.2 million the year ­before.

That’s building on Ulta Beauty’s 2014 fiscal year, when sales rose 21.4%, hitting $3.24 billion. Dillon’s blueprint for the future is to reach more than 1,200 doors by 2019, at a pace of 100 new units a year. She noted during a conference call that Ulta Beauty gained market share across the board in all categories, with prestige and mass achieving the strongest growth.

She highlighted Ulta Beauty’s six strategic imperatives, relating how the recent results exemplify those efforts. The first is to acquire new guests and deepen loyalty with established consumers.

“Our loyalty team is driving great performance through the critical Ultamate Rewards platform, which drives well over 80% of our sales,” Dillon said. “We now have 16.1 million active members, up 18% over the prior 12-month period.”

One reason for the dramatic jump is the ability of store associates to convert shoppers to the loyalty program. These are valuable consumers who have higher frequency of purchases, higher average ticket and higher average sales per member.

Under Dillon’s leadership, Ulta Beauty is relaunching its brand communications across all touch points to create an integrated message and consistent visual look positioning Ulta Beauty as the “fun side” of beauty.

“We believe this work sharpens and differentiates Ulta Beauty in the marketplace, and shapes our brand equity through a coordinated approach across all of our marketing vehicles, including advertising, emails, Ultamate Rewards materials, website and mobile apps, digital ads, store signage, social media, and customer magazines,” Dillon explained.

Next up: national advertising to support the upcoming 21 Days of Beauty campaign as well as the holiday season.

“This national, brand-building television advertising campaign marks a first in Ulta Beauty’s history, an important step toward driving a strong and sustainable brand position while increasing awareness among beauty enthusiasts and driving new guest acquisitions,” Dillon explained.

Another strategic pillar is to differentiate Ulta Beauty’s offer through a distinctive and personalized guest experience across all channels. Store technology and associate training are key aspects in this effort, she said. “Let me give you a few examples. As we continue to improve our ability to personalize our emails and make them more relevant to our guests, we’re seeing very positive results. By leveraging insights about customer preferences and behaviors, we’re able to tailor our communication to be more targeted and more motivating to our guests. During the second quarter, sales per email delivered increased significantly year over year as a result of this approach.”

She also cited personalized display ads to better target messages that are relevant to customer attributes and shopping behavior, moving away from predominantly static ad formats. The differentiation is ramped up as far as Ultamate Rewards, where the best guests enjoy special perks such as platinum-only beauty steals, early access to new items, free shipping and special gifts.

Ulta Beauty’s third imperative is to offer relevant, innovative and often exclusive products that excite guests. “News and innovation was strong in the second quarter, and prestige color cosmetics remained our best comping category,” Dillon said. Some examples include foundations from Too Faced and Smashbox, Urban Decay’s matte lipsticks and the coveted Naked Smoky Palette.

She also said Ulta Beauty’s exclusive IT Brushes along with IT Cosmetics remained popular. The contouring trend is still going strong, and the newer technique for strobing, or highlighting, drove comps in contouring kits and highlighters, with newness from Anastasia, Lorac, Laura Geller and Tarte among the best performers, Dillon ­related.

“We continue to roll out Clinique, Lancome and Benefit boutiques, and all these brands executed very strong product launches, such as Benefit’s Roller Lash mascara, Clinique’s Pop Lip Colour + Primer and Lancome’s Cushion Compact foundation,” she said.

There are plans to expand the Lancome presence by launching five of the brand’s best-selling items into every store (not just those with Lancome boutiques). “This full-chain expansion is a further demonstration that our business model is successfully driving incremental growth for key brand partners.”

While prestige certainly attracts consumers, mass carries its weight, too. NYX, Maybelline and L’Oréal are among the top performers. Two new indie brands from the U.K. — Catrice and Makeup Revolution — were recently added to selected stores.

Private labels are boosting mass, too. “We reset the Ulta Beauty Collection in more than 300 stores at the end of the quarter with enhanced presentation as well as new formulations. The wall presentation is updated with color shelf strips and textured tile graphics, making it easier to shop as well as more efficient for our associates to stock the fixtures. We also introduced a fresh series of Ulta Beauty Kits offering great value and products that leverage current trends, including contouring, primers and brows,” Dillon pointed out.

Hair care is a big focus, thanks to such events as Love Your Hair. There was also a reset of the professional hair collection.

Exceptional services are the fourth imperative, and the concentration on delivering excellence in hair care, skin health and brow services helped the salon business expand almost 20% (more than 10% for comparable salons). Dillon said comp growth was fueled by the online booking offer and campaigns to target first-time ­users.

“Turning to our fifth strategic imperative: to grow stores and e-commerce to reach and serve more guests. We opened 20 stores during the quarter, ending the second quarter with 817 stores. New-store productivity continues to be very strong for the class of 2015 new stores, which are comfortably exceeding their sales plan. We remain on track to open approximately 100 net new stores this year, with plans to open 44 stores in the third quarter and about 15 stores in the fourth quarter,” she said. There’s a strong pipeline of new stores, and the two 5,000-square-foot rural stores, which we opened last fall, continue to perform very well, the chief executive confirmed. “We intend to open more of these small stores when we have the systems in place to make this format more scalable.”

On the e-commerce side, Ulta.com continues its rapid growth, with sales up 43.4%, contributing 120 basis points of the total company comparable sales increase of 10.1%.

“And, finally, we have much to report on our sixth strategic imperative, to invest in infrastructure to support our guest experience and growth, and capture scale efficiencies. We celebrated the grand opening of our Greenwood, Ind., distribution center on August 3, and we started to fulfill a small number of stores and e-commerce orders. We launched with six stores, and we’re now gradually ramping up this facility, which is operating on a completely different model from our existing DCs and includes all-new systems and material handling equipment,” she said.

Dillon said the facility will open up doors for a more efficient operating model, with stores receiving fewer, yet fuller cartons making it easier for store associates to get products to the shelf. “We’re also implementing a number of core merchandising systems and tools to drive productivity as part of the overall supply chain initiative. For example, this fall we’ll launch a product information management system that integrates vendor information into Ulta Beauty systems and aligns product information across all channels to improve data governance,” she explained.

“We also plan to roll out a vendor scorecard to collaborate with our brand partners to drive improvements in performance, such as improved inbound lead time consistency leading to better in-stock levels and an improved guest experience.”

The second quarter results are, in a sense, a snapshot of how the company has been firing on all cylinders under Dillon, who joined the company two years ago from U.S. Cellular. But there’s still a lot on her to-do list — including further expanding Ulta Beauty’s recognition.

Wall Street is confident in her stewardship and her laser focus on the consumer. “It is the best box out there,” said Oppenheimer analyst Rupesh Parikh. Added William Blair analyst Daniel Hofkin, “She is good at identifying what is working and what needs change.”

With the look of Ulta Beauty’s results, it is full speed ahead.

Editor’s Note: To read the full nine-page special report on Ulta Beauty, please see the Sept. 28, 2015, print issue of Chain Drug Review.