While some other retailers are closing hundreds of stores, Ulta Beauty is proclaiming that its brick-and-mortar locations are profitable and serve as its crucial growth engine.
In fact, Bolingbrook, Illinois-based Ulta, which now has over 1,411 stores across 50 states, is stepping up its expansion, with plans to open 200 stores over the next three years. The retailer told investors and Wall Street analysts on Wednesday that it's targeting having more than 1,800 standalone stores in its fleet over the long-term.
"There has been so much change across the retail landscape since our inception and even in just the last 10 years since I've been with this company," Ulta President Kecia Steelman said. "But one truth remains: Stores really are the heart of our model. ... Stores remain the preferred method to shop for beauty."
Steelman made the remarks at Ulta's investor day event, where the beauty-goods retailer outlined its strategic priorities and announced a new $3 billion share repurchase. Many of management's remarks related to its real estate plans. Executives told Wall Street analysts that with the beauty market booming, Ulta has the opportunity to increase its market share by opening more brick-and-mortar locations where it already has a presence, to enter small markets where it has no stores and to test variations in store size.
The announcements came amid a retail landscape where chains ranging from Walgreens Boots Alliance to Big Lots to Macy's are shuttering hundreds of locations they say are unprofitable — a situation exacerbated as some consumers pull back on their spending. Ulta is not immune to such challenges. CEO Dave Kimbell discussed the difficult environment in terms of shoppers tightening their purse strings and competition in its retail sector. For fiscal 2024, Ulta reiterated its guidance that comparable store sales would be flat or down 2%.
Increased competition
Ulta may be the largest specialty U.S. beauty retailer for cosmetics, fragrance, skin care products, hair care products and salon services, but it's still just one player in the fragmented $112 billion U.S. beauty products market. Competition is fierce, with rivals such as mall staple Sephora, Amazon, mass-market retailers, department stores, and even off-price sellers such as T.J. Maxx in the game. And, in another possible obstacle for Ulta, available space to open new stores is extremely tight.
Nonetheless, Steelman argued the case for Ulta's expansion despite the challenges, citing consumer habits, past history and data. First, she described brick-and-mortar's edge over online shopping for cosmetics and other goods.
"Now I know it may seem counterintuitive, but today, more than two-thirds of beauty enthusiasts prefer to shop for beauty in stores because that's really where it comes to life," Steelman said. "It's where they can test and trial and engage with other beauty enthusiasts. Our stores are one of our most valuable assets and they generate a lot of cash."
She also discussed Ulta's current fleet.
"Real estate is one of our core competencies, and our store expansions continue[] to be a deliverer of performance and an effective use of our capital resources," Steelman said. "Our recent performance reaffirms the strength of our model and the power of new stores. Existing stores consistently deliver against our profitability targets."
Ulta's research indicates that it has room to expand in 75% of the markets where it already has a footprint, according to Steelman. In Dallas-Fort Worth, Ulta added stores, going to 45 from 37, from 2019 and 2023. As a result, it increased its market share, attracted new customers, prompted multistore and multichannel shopping and increased spending per shopper in that area, according to Steelman.
"While we know the beauty landscape has evolved and distribution has expanded, we do not believe the market is over-saturated," she said.
Small markets targeted
Ulta is also pursuing growth in nontraditional smaller markets where there is untapped demand for some products, such as prestige or specialty beauty goods, according to Steelman. The strategy is to debut small-format stores and to offer a curated assortment of prestige and mass-market brands, she said. The retailer has three store prototypes in the works, at 5,000, 7,500 and 10,000 square feet. And it did a small-market test in Wilson, North Carolina, according to Steelman.
"Now as someone who grew up in a smaller city in Iowa, I know firsthand that access to beauty in smaller markets can be harder to come by," she said. "And we know consumers in these markets are passionate about beauty. We want to be the beauty destination for beauty enthusiasts everywhere."
Steelman also explained the economics of rolling out a new Ulta store. The average investment in a new location is $2.1 million, with first-year sales typically $4.1 million. The payback period for those news sites is three to four years, according to Steelman.
"New stores are delivering strong results amidst a dynamic and competitive environment, and small-market tests have shown encouraging results offering us a new growth opportunity," she said.
Ulta is also reaching a new audience with its 1,000-square-foot shops located within Target stores, according to Steelman. That initiative kicked off in 2021, and there are now Ulta shops in more than 500 Target locations, she said. Sephora has a similar partnership with the department-store chain Kohl's.