By Neil Saunders
Ulta has ended its third quarter with yet another set of strong results on both the top and bottom lines. Despite tough prior-year comparatives, sales have advanced at pace, making Ulta a winner not only in the beauty category but in the retail sector as a whole.
Revenue uplifts on both a total and comparable basis are comfortably outstripping growth rates in the overall beauty sector, indicating that Ulta continues to take market share. Much of this is coming from new customers who are deserting, or at least spending less on beauty, in department stores, drugstores, and some other traditional channels. Ulta is accelerating this trend throughout this fiscal year by opening around 80 new shops, some of which are squarely on the turf of rivals. Physical expansion remains smart for Ulta, as the company has demonstrated that its’ product authority and range of services give its’ stores the power to generate strong customer traffic and help boost online sales in the trade area.
New store openings are an important source of growth, but so is the improved traction and brand visibility, which is drawing more shoppers – including younger demographics – to the brand. Over the past year or so, we have detected a subtle shift in Ulta’s marketing messaging, which is now more emotionally driven. We believe this has given the brand more personality and has activated some consumers who previously saw Ulta as a basic or functional beauty player. Good marketing has gone together with the launch of exclusive lines and assortments designed to appeal to a younger generation of shoppers as well as to those who want excitement and newness from a beauty offering.
Once it has customers through the door, Ulta is good at converting them into members of its Ultimate Rewards loyalty program, which now has around 33 million active participants. As part of this scheme, 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 simplicity of the rewards structure, which offers store credit for hitting certain targets is appealing.
Another part of Ulta’s success is constant range innovation. High-profile brands like Kylie Cosmetics are driving traffic to stores, while expansion of popular labels like elf and ColourPop are generating interest and allowing Ulta to grow in the fashion-focused part of the mass cosmetics market. Exclusive lines like Uoma Beauty, which is inspired by African pallets and beauty, are also helping to make the Ulta offer feel more inclusive of all skin types and colors. Looking ahead, we believe Ulta is upping the pace of innovation, which should improve visit frequency and aid the company in becoming more of a fashion powerhouse within the beauty market.
Ulta has also seen good growth on the services side of the group, partly helped by allowing loyalty members to redeem points on salon offerings. This side of the business has great potential and is a good way for Ulta to further bolster footfall and product sales in its physical shops.
Looking ahead, despite a long run of growth, Ulta still has a lot of runway left in the domestic market. This, combined with overseas expansion into Canada, makes us optimistic about the company’s future.
Neil Saunders is managing director of research firm GlobalData Retail.