Ulta Beauty Eyes Mass Markets’ Share

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Ulta Beauty Eyes Mass Markets’ Share


By Mike Troy

Ulta Beauty is doing something rarely seen in the current retail climate: generating double-digit same-store sales growth, increasing customer traffic and average transaction sizes, and accelerating store growth and profits.

The operator of 928 stores recently elevated already-high expectations when it announced third quarter same-store sales would range from 14 percent to 15 percent, compared to earlier guidance in the 11 percent to 13 percent range, and on top of a prior year increase of 12.8 percent. The increased sales forecast was shared during an investor conference on Oct. 13 where CEO Mary Dillon and other top executives shared with attendees details regarding the company’s strategic plans and opportunity to double market share.

“We are confident that executing against our strategic imperatives will continue to drive excellent financial results and create sustainable, long-term shareholder value,” Dillon said.

There are few doubters when it comes to the question of whether Ulta can continue to gain share, especially in light of its accelerating momentum and company estimates that it currently has just a 4 percent share of a total U.S. beauty market valued at $127 billion. Ulta opens roughly 100 stores annually, and an updated real estate analysis shared with investors now envisions 1,400 to 1,700 stores in the U.S.

The company’s rapid pace of expansion has been a key driver of same-store sales growth in recent years. One of the company’s 10,000-sq.-ft. stores typically produces first-year sales of $3.1 million, but by the fifth year of operation annual sales are around $4.5 million. The new store growth and resulting share gains explain why Ulta’s 2016 same-store sales are projected to range from 12 percent to 14 percent, compared with 11.8 percent in 2015, 9.9 percent in 2014 and 7.9 percent in 2013.

In addition to stores, Ulta’s online business has grown rapidly. The e-commerce business quadrupled to $221 million by the end of 2015, representing 5.6 percent of sales, but Ulta projects online sales will double to 10 percent of sales within three years, and within five years online will be a $1 billion business.

Whether online or in stores, Ulta’s loyalty program, dubbed “Ultamate Rewards,” is a key driver of growth. The program’s 20.6 million participants account for 90 percent of sales and have allowed Ulta to be less reliant on margin-eroding price-based promotions to drive customer traffic and sales.

As a result, operating margins have benefitted, and Ulta keeps increasing its profit forecast. That was the case in the third quarter, with net income now estimated to be in the range of $1.35 to $1.38 per share, compared with prior guidance of $1.25 to $1.30 and prior-year net income of $1.11.

Longer term, the company contends the business can deliver earnings per share growth in the low twenties percentage range for fiscal 2017, 2018 and 2019, despite growing from a much larger base compared to initial expectations when Ulta first shared its strategic plan in 2014. The company has raised its view of long-term comparable sales growth to a range of 7 percent to 9 percent, compared with 5 percent to 7 percent previously. It also expects its operating margin rate to expand by 200 basis points to a mid-teens range by the end of the 2019 fiscal year.