By Anthony Riva
Ulta continues to advance its market share across most beauty categories. While today’s results show a material slowdown in comparable sales growth, that means a solid uplift of 11.7%. Improvements to merchandise margins amplified revenue growth, allowing operating profit to swell by just over a quarter.
Ulta’s success factors:
- better merchandise margins
- smart marketing campaigns
- simple loyalty program
- the addition of brands, including MAC shop-in-shops
- good online margins, with sales feeding in-store sales
Spending increases on beauty continue to trend well above other categories. However, Ulta’s growth is well above average and there are plenty of other players with more subdued numbers.
Part of Ulta’s continued success is due to customer acquisition, particularly from failing department stores. Ulta has also had some success in pulling customers away from the beauty propositions of mass merchants and supermarkets.
Recent marketing efforts have helped to sustain this trend of customer shifting. Advertising on traditional media as well as campaigns with Refinery29 and PopSugar have allowed Ulta to expand brand awareness and reach new, often younger, customer segments. The company’s better use of social media has also played an important role in increasing its reach.
As vital as customer acquisition is, Ulta’s ability to continually deepen its relationships with existing clients also plays a key role. The vast majority of regular customers participate in its loyalty program. Targeted marketing and communications keep customers interested, while the rewards program encourages them to divert as much of their beauty spend to Ulta as they can. The rewards structure offers store credit for hitting certain targets, so customers can get a discount on any brand or product they like.
The addition of more brands across all parts of the offer is another factor behind Ulta’s success. This includes the recent addition of MAC, not just as a product line but as a shop-in-shop boutique. Ulta intends to roll out the boutique concept to around 100 more stores. This gives Ulta more firepower to compete with Sephora and other specialist beauty outlets.
E-commerce sales grew by 72% this quarter, and online shoppers spend more in stores than non-online customers.
As successful as stores are, e-commerce continues to stand out. Sales via the channel grew by 72% this quarter, and there is no evidence to suggest that this is coming at the expense of stores. Indeed, if anything, online shoppers spend more in stores than non-online customers. Ulta’s online margins are reasonably strong, and the gap with physical is much smaller than it is for many other retailers. So online growth makes a steady contribution to the bottom line.
Looking ahead, no significant weaknesses make us concerned about Ulta. Certainly, comparable growth will come in lower than it has done in past years, but this is to be expected as the business matures. Overall, Ulta is set for further gains.
Anthony Riva is an analyst at research firm GlobalData Retail.