Commentary: Ulta in prime position to capitalize on holiday
Ulta has finished its third quarter with another very impressive set of numbers. Despite lapping some tough comparatives, the pace of growth has quickened with strong uplifts in total and comparable sales, as well as on the bottom line where operating and net income both grew by well over 20%.
There are a few sources of Ulta’s success. The first is the continued interest in beauty among consumers, with both younger and older demographics driving strong growth in the category. Ulta has traditionally done well with middle aged and older customer segments, but we now believe that it is pulling in more younger customers: mostly thanks to its marketing and social media efforts over the past year. Those same marketing efforts, including national advertising for the 21 Days of Beauty and Gorgeous Hair events during the fall, have also exposed more consumers to the Ulta brand.
While the rising tide of beauty is floating all boats, Ulta is growing far faster than the market which highlights the fact it is taking share. One of the reasons for this is the strong pace of fleet expansion which has seen total floorspace grow by 10% over the last year. In our view, despite having 949 stores there is still headroom for growth – perhaps up to 1,700 stores across the US. The local nature of beauty, which means consumers do not want to travel long distances to buy it, means that Ulta can afford a large network of shops. Even in the digital era, the regularly changing assortment in stores is a pull for consumers, while the salon services offered also help the company to draw in customers and defend itself against the rise of online specialists.
Despite its investment in stores, Ulta has also invested heavily in e-commerce and this is paying dividends. The website is easy to use and enhancements to the mobile proposition have helped to increase transactions and conversions. New tools, like the Glam Lab which allows shoppers to take a photo of themselves and virtually try out different shades of cosmetics – has also increased engagement.
As much as Ulta is doing a lot of things to help itself, it is also benefitting from the problems of other retailers. Department stores are losing their share of beauty shoppers as their overall propositions become less appealing; equally, Avon is still struggling to hold on to its existing customers. Not all of these lost souls are finding their way to Ulta, but many are and this is providing a nice boost to growth. We believe that this benefit will likely continue over the course of the next fiscal year.
Looking ahead to the holiday quarter, we remain optimistic about Ulta’s prospects. Beauty is high on the gifting agenda this year, and traditionally does well in terms of self-purchase during the holiday season. Ulta is in prime position to take advantage of this. That said, while comparable growth will remain in double digits, it may come down slightly as the company comes up against a strong performance from the prior year.