THE NEXT FIVE YEARS
It is conceivable that Ulta could double its store base over time, although the company has provided no such direction. Ulta declined Retail Leader’s request to speak with Dillon or respond to written questions, but more details on the company’s long term vision will come this fall when Ulta hosts an annual investor conference. The company’s current projections, shared with investors in 2016, envision a range of between 1,400 and 1,700 stores. However, Ulta ended last year with nearly 1,100 locations and with plans to add another 100 stores this year it will soon hit the low end of it store expansion range.
Although Ulta expects greater growth in e-commerce, that doesn’t negate the need for more stores. One look at its store location map reveals opportunities to increase penetration in existing markets and enter new ones. Stores are vital to Ulta’s future due to the offering of salon services that generate invaluable traffic and provide an experience that can’t be replicated online.
There are also abundant real estate opportunities for the typical 10,000 square foot Ulta Store and the retailer’s solid financial footing makes it a desirable tenant for shopping centers. A new store requires a net investment of about $1.6 million and within five years annuals sales of the typical store are approaching $5 million.
Of course, competitors are sitting still and Ulta isn’t sneaking up on anyone these days, with some of the easy market share gains already had. For example, Ulta’s ascent has corresponded to weakness in the department store channel and Macy’s in particular. Macy’s spent the past five years rightsizing its department store fleet, which now numbers about 650 locations compared to nearly 800 five years ago. During that time, its sales declined to $24.8 billion from $27.9 billion. Roughly $3 billion in revenue went to competitors, including Ulta Beauty, since Macy’s generates 38 percent of its sales from the broad categories of women’s accessories, intimate apparel, shoes and cosmetics.
However, Macy’s remains a formidable player that understands beauty is an enduring category, which is why in the midst of deteriorating fundamentals at its core business it acquired the upstart Bluemercury beauty chain in 2015. Macy’s has since expanded the concept’s freestanding locations, adding 37 new locations last year to end with 137 total.
Ulta’s future share gains from mass merchants could also be under pressure. Food, drug and mass retailers account for roughly half of the $82 billion beauty products market where Ulta figures its share is about 6 percent. Retailers such as Walmart, Target, Walgreens and CVS Health operate a combined 25,000 stores that may not offer Ulta’s breadth of assortment but are certainly more convenient and routinely being refreshed with fixtures and lighting to improve the experience and assortments optimized to reflect the latest trends.
Ulta also faces a challenge on the high end from Sephora, the beauty retailer supported by the resources and prestige of its $50.9 billion parent company and leading global luxury goods purveyor LVMH Moët Hennessy Louis Vuitton. Sephora currently operates 370 U.S. stores and 590 locations inside J.C. Penney stores. Specifics about Sephora’s growth plans are hard to come by, but the brand falls into the second largest of LVMH’s five divisions known as “selective retailing,” which generated 39 percent of its 2017 revenues of $15.9 billion from the U.S.
Perhaps more concerning about Sephora is its status as the preferred destination for younger shoppers. In its semi-annual spring survey called Taking Stock With Teens, Piper Jaffray research showed Ulta was the second most popular beauty destination after Sephora. The good news for all beauty retailers is that the survey of 6,000 teens showed beauty spending hit a new high for females at $368 per year led by skin care, up 18% year-over-year.