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Beauty Rises Above the Amazon Brawl

By Linda McDonough on June 21, 2017

There’s a food fight going on in the grocery store. Amazon’s recent purchase of Whole Foods is another nail in the coffin for an industry that’s been hurting for some time. An explosion of new entrants, cut-throat pricing, and fussy customers are mangling profits for this group.

But over in the beauty aisle, it’s another world entirely. Aptly named beauty retailer, Ulta, is the ultimate success story in retailing right now. Revenue grew 24% last year and profits 31%. In the first quarter of this year, one littered with retail catastrophes, Ulta’s revenue jumped 22% and profits 42%. Same-store sales, which measures sales growth without new stores, blossomed 14%.

Ulta is opening its 999th store this month. The store, located on tony Mag Mile in downtown Chicago, inches Ulta’s store count up towards quadruple digits. Ulta CEO Mary Dillon regularly notes the company’s long-term goal of 1,400-1,700 stores. For comparison, Target has roughly 1,800 stores in the U.S.

As an analyst who spends a lot of time dissecting consumer goods and retail, Ulta’s success is a worthy case study. Product by product, Amazon is decimating profits for consumer goods. What began with books soon morphed into electronics, clothing, pet supplies and now groceries. What has allowed Ulta to build a seemingly wide moat around its beauty castle?

Sephora, a chain of 2,300 cosmetic stores owned by LVMH Moet Hennessy Louis Vuitton, is also experiencing beautiful growth. Its stores are half the size of Ulta’s and are more exposed to mall traffic, but it is still enjoying double-digit revenue and profit growth according to management.

Ulta is fortunate to be in the one segment of consumer spending that is growing. Although the overall beauty segment is growing just 3%, quirky boutique brands are growing double and triple digits.

The internet has made it easier to introduce new brands. Low barriers to entry allow entrepreneurs like Emily Weiss, CEO of Glossier, to start new cosmetic lines in their apartments. Glossier, one of the few super successful brands to remain independent, has built up an incredibly faithful group of followers who religiously follow Glossier’s Instagram account for new ideas.

Urban Decay, NARS and tarte are some of the other highly popular brands fueling Ulta and Sephora’s revenue growth. As cosmetic manufacturers like L’Oreal and Estee Lauder frantically search for ways to resurrect growth in their flagship brands, Ulta simply juggles its shelf space away from slower growing brands to the new hot ones.

Ulta has also wisely added services to its stores. Eyebrow waxing, hair salons and now a Dry Bar, where consumers have a sleek hair “blow-out,” are offered at most locations. Although these services are less profitable, they bring in new customers on a regular basis who likely drop a handful of cash down for some hair products or lipstick on the way out.

Ulta’s stock, which trades with a forward price to earnings ratio (P/E) of 30 is a bit too rich for me to add to the Profit Catalyst Alert portfolio, but it is on my radar. In an industry with rich growth and many moving parts, I am shopping in the beauty aisle for winners and losers.

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