This High Growth Retailer Is Poised to Outperform


Beauty retailer Ulta Salon has been an extraordinary growth story in recent years. Unfortunately success breeds emulation and the company is facing rising competition from players like like Sally Beauty and Regis , not to mention the ultimate retail disruptor, Amazon . The outcome of this battle for your cosmetics dollars will have major implications for investors which begs the question: Can Ulta continue shining in the future?

Beautiful growth
Ulta Salon is the biggest beauty retailer in the U.S., the company owns more than 660 stores offering over 20,000 prestige and mass beauty products in categories like fragrance, hair care, skincare, bath and body products and salon styling tools, as well as salon hair care products. The company also offers a full-service salon in all of its stores.

Ulta has clearly outgrown competitors like Sally Beauty and Regis by a considerable margin over the last years, and the trend is not reversing judging by recent financial reports.

Ulta will be reporting earnings for fiscal 2013 third quarter on Dec. 5, but figures for fiscal second quarter ended on Aug. 3 were remarkably strong. The company reported a big increase of 24.8% in revenue for the period to $601 million from $481.7 million in year ago quarter, this was fueled by a strong increase of 8.4% in comparable store sales for the quarter.

Sally Beauty is focused on professional beauty products, the company is bigger than Ulta with more than 4,500 stores around the world, but it doesn't come close to Ulta in terms of growth rates. Sally Beauty reported a 2.7% increase in revenues for the quarter ended in September, with same store sales increasing by an uninspiring 0.4% during the period.

Regis is a global leader in the hair salon industry with nearly 10,000 worldwide locations. The company is in the midst of a complex reorganization aiming to increases efficiencies and reignite growth, but financial performance during the last quarter showed little or no signs of improvement as revenues fell by 7.3% during the third quarter of the year on the back of a 5.4% decline in same store sales.

While Sally Beauty and Regis don't seem to be too much of a risk for Ulta at this stage, Amazon is a completely different thing. The online retailer has been gaining participation in several product categories over the last years, revenues increased by 31.5% annually from 2002 to 2012 and sales during the last quarter grew by a remarkable 24% to $17.09 billion. Nothing short of amazing for a company of its size.

Amazon´s efficient cost structure, innovative culture and aggressive competitive drive make it a risk that should never be underestimated when making investment decisions in different retail segments. Does Ulta Salon have what it takes to keep Amazon at bay?

Glowing competitive strength
As opposed to Amazon, Ulta is deeply specialized in beauty products, covering an enormous variety of categories across price points and brands. The company strives to become a one-stop shop for customers looking for different kinds of beauty products including prestige, mass and salon products and services under one roof.

Even if Amazon can increase its beauty products assortment over time, instant gratification is still an advantage for Ulta Salon and customer experience is a very important factor to keep in mind. Ulta offers a distinctive environment and the differentiated customer experience than only a specialized retailer can provide.

Store design, a friendly team of sales associates which are non-commissioned to avoid excessive sales pressure, experiential boutiques and testers as well as a team of licensed stylist and estheticians can make all the difference in the world for women-and men-shopping for the right beauty products to fit their particular needs.

The company's loyalty program had nearly 12 million members as of the end of the last quarter, a whopping annual increase of 19%. Ulta makes more than 50% of revenues from customers in its active loyalty program, and this provides healthy protection against the competition and a positive reflection on the company's differentiation power and customer loyalty.

Online sales were particularly strong with a jump of 72% in the last quarter and contributing 130 basis points to comparable store sales growth. Ulta launched its mobile shopping app in 2012 and the company is redesigning its website, increasing fulfillment capability, and dedicating more human resources to online sales in the middle term.

Even if Amazon will gain participation in beauty products over the next years, that doesn't necessarily need to come at Ulta´s expense. The company still has ample room for expansion, management estimates that Ulta has a market share of nearly 2% in a market which is worth more than $100 billion in the U.S. alone. Ulta believes it´s current penetration rate is around 50% as the company plans to ultimately reach nearly 1,200 stores in the country.

Bottom Line
Ulta provides the kind of product assortment and customer experience that only a specialized retailer can deliver. The company has a loyal customer base and plenty of room for store expansion over the coming years. Amazon is always a risk to monitor when investing in retail, but Ulta Salon has the competitive differentiation to continue shining for years to come.

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Andrés Cardenal owns shares of Amazon. The Motley Fool recommends and Ulta Salon, Cosmetics & Fragrance. The Motley Fool owns shares of and Ulta Salon, Cosmetics & Fragrance. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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