The Future of Ulta
Ulta Beauty has big plans.
The beauty retailer unveiled its vision for the future on Tuesday during a multihour virtual Investor Day meeting. The retailer’s way forward includes 50 net new stores per year; testing small-format retail locations; launching the “digital store of the future”; setting up its own editorial operations, and launching a new business called UB Media, a retail media network.
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“As we look forward, we must acknowledge that we are operating in a time of unprecedented change,” said Ulta chief executive officer Dave Kimbell as he opened the event. He called 2020 an “incredibly disruptive year, globally” and noted that the pandemic has created “permanent shifts in behavior.”
“The social justice movement has pushed consumers to reflect on what matters to them, and they are making choices that align with causes and companies that are driving positive change,” Kimbell said. He highlighted Ulta’s commitments to diversity, including its commitment to the 15 Percent Pledge and the MUSE 100 (Magnify, Uplift, Support and Empower) program, which is meant to support Black voices in the beauty industry.
Black shoppers, Latine shoppers and Gen Z shoppers are especially important for Ulta’s future, executives highlighted during their presentations Tuesday.
Ulta also released financial targets for 2022 through 2024. The retailer expects net sales growth between 5 percent to 7 percent, reaching $10 billion in annual sales by 2024. For 2021, the company is expecting to bring in $8.1 billion to $8.3 billion in sales. Ulta stock dipped on Tuesday on the news, closing down more than 10 percent, as Wall Street reacted to “long-term financial targets [that] were a bit shy of elevated expectations,” Steph Wissink, an analyst for Jefferies, wrote in a note.
Kimbell said beauty retailing is evolving, and now includes self care and wellness. He added that consumers also have more choices as democratization of the category continues, and that expectations around personalization have risen.
“The role of physical stores continues to evolve as consumers signal their desire to shop in physical stores for beauty, but have an elevated expectation about the experience delivered,” Kimbell said.
Ulta’s Retail Plans
Ulta executives said the retailer has the opportunity to operate 1,500 to 1,700 stores in the U.S., and the plans for international expansion remain on the back burner. Before the pandemic, Ulta had plotted an expansion into Canada. The business plans to open 50 net new stores per year, Kimbell said.
The retailer will also experiment again with smaller format stores, which it had previously tested years ago. Executives said that since then, the beauty market has evolved, as has Ulta’s concept for the small-format stores. “Our vision is to create a 5,000-square-foot Ulta Beauty store that can serve as a beauty discovery destination in smaller markets with tailored assortments and services,” said Ulta’s chief operating officer Kecia Steelman. “Our learnings from these pilots will inform how we scale these experiences beyond 2022.”
Ulta will also cut unproductive stock keeping units, executives said, and move around the format for new and renovated stores to push the skin care assortment to the front.
To meet continued strong demand for online shopping, Ulta will expand services, experimenting with same-day delivery in some markets and implement Beauty to Go, a two-hour buy online, pick up in store option, executives said.
By the end of this year, Ulta expects to have 100 shops-in-shop open with Target, executives said. Ulta loyalty members receive rewards for shopping at the Target locations, which they can redeem at Ulta stores, Steelman noted. “The majority of our members shop Target today with high frequency, so we can deepen that loyalty with them. We also have an opportunity to introduce Ulta Beauty to new guests,” she said.
Ulta is also working to become more nimble and planning to invest between $160 million and $180 million over the next three years to upgrade its resource planning platform, Steelman said. The retailer also plans to introduce “market fulfillment centers” in order to fulfill e-commerce orders and help serve stores.
The “Digital Store of the Future”
On the digital side, Ulta is also quietly rolling out what it calls the “digital store of the future,” which is a website and app refresh combined with content and increased personalization tools for shoppers.
“The guest journey is increasingly blurring across physical and digital channels,” Steelman said. “This journey often starts in one channel and finishes in another. It’s no longer linear or binary, rather it’s fluid and it sees the guests really shifting effortlessly between channels to meet their individual needs.”
Prama Bhatt, Ulta’s chief digital officer, said in an interview that Ulta has improved its technology on the back end in order to create better digital experiences for shoppers.
“We’re really excited about doing a refresh on our site and app, so [the digital store of the future is] definitely that, and then some,” Bhatt said. “It will be a whole new personalized search engine that’s more advanced, we will start to bring all of our beauty tips and tools more appropriately in the journey, so the browse and discovery journey start to come together more.”
The digital shifts will roll out gradually, she said, and are supported by Ulta’s investment in AI retail technology Adeptmind. Ulta has been working with the start-up since last year, Bhatt said, but officially invested in it over the summer.
Adeptmind’s technology will be combined with Ulta’s proprietary Quazi platform, developed after its 2018 acquisition of QM Scientific, to develop better search tools, Bhatt said. “The goal is to allow for search to become more, over time, of a two-way conversation where you get the responses you’re looking for and it guides your beauty discovery journey,” she said.
“The new digital store is where we seamlessly merge content with commerce, easily help guests find what they are looking for and introduce them to products and services they didn’t know they needed,” Bhatt said in the presentation.
New Lines of Business
Ulta executives said the company is building out an editorial team to help develop content across different digital touch points.
The business is also launching a segment called UB Media, which chief marketing officer Shelley Haus described as a retail media network meant to “unleash the power of our data in service of our customers and our brand partners, as well as unlock a new revenue stream for Ulta Beauty, one that is highly incremental and margin accretive.”
UB Media is meant to operate as a media platform that Ulta’s brand partners can use to place ads on Ulta’s site and app, as well as outside sources like Facebook and Instagram. “We will provide closed loop reporting and insights on their return on investment, which is not something most media solutions can provide,” Haus said.
Monica Arnaudo’s Category Predictions
Monica Arnaudo, Ulta’s chief merchandising officer, said while Ulta is considered the largest specialty retailer across mass and prestige in the U.S. by Euromonitor, there is still more room for growth. Ulta has a 7 percent market share of the U.S. beauty landscape, Arnaudo shared, and is focused on its conscious beauty platform, adding Black and people of color-owned beauty brands, and on exclusives.
Arnaudo also share upticks across categories that Ulta has experienced since stores closed in 2020 due to the coronavirus pandemic.
Makeup sales dropped by 26 percent at Ulta in 2020, but in the first half of 2021 were up 51 percent, she said.
“A desire for self expression and engaging platforms like TikTok have reignited the category engagement through generational belonging, new beauty influencers and new content forms, all with the ability to generate high viral activity,” Arnaudo said.
Makeup formats have become more skin care-like, with sensorial products such as balms, sticks and creams gaining tractions. New brands at Ulta include Hourglass, Bobbi Brown, Mented and Blk Opl.
Skin care dipped only slightly — 1 percent — in 2020, and is up 66 percent in the first half of 2021, Arnaudo said. “Younger consumers are engaging much earlier than prior generations, which drives growth and creates ongoing opportunities,” Arnaudo said. New brands include Drunk Elephant and Keys Soulcare. Supergoop is slated for a January launch.
The hair category has benefited from the skinification of hair and the emergence of the bond building category, Arnaudo said. Vegan hair products and products for textured hair are of particular interest to consumers, she noted. Ulta’s hair care sales dipped 11 percent in 2020, but are up 67 percent in the first half of 2021. New brands include Biogeo, Camille Rose and IGK.
Fragrance and bath grew 11 percent in 2020, and are up 129 percent in the first half of 2021. Ulta is now selling Tom Ford and Valentino, among other lines. “Our growth is fueled by luxury and celebrity fragrances, along with a wellness focus,” Arnaudo said.
“We’ll continue to work to strike the right balance, reducing reliance on any one category,” Arnaudo said.
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