Ulta Beauty is a thing of beauty. Both the company and the stock are exceeding everyone’s expectations. But like all beautiful things, they can wither from old age and neglect. Ulta Beauty’s strategy is on the edge of doing just that. Yes this sounds crazy, but read on.
It is management’s job to look forward and around the corner in order to set and adjust strategy. Let’s look around the proverbial corner.
Since their 1990 launch, Ulta maintains their force fields of differentiation:
- The combination of high/low merchandise price points.
- Full-service salons are in the back of every store.
NO COMPETITOR HAS BEEN ABLE TO COPY THESE DIFFERENTIATORS
Their financial position is equally astonishing. On October 25, 2007, Ulta Beauty (NASDAQ: ULTA) went public and opened at $18. Right now, the stock is about $350. If you are counting, that is over 18x your money. They are also completely debt free.
“The Ulta Beauty team delivered excellent results in the fourth quarter,” said CEO Mary Dillon. “This performance reflects an acceleration in comparable sales in our retail stores, primarily driven by traffic.”
Ulta focuses their execution on product, beauty services and in digital. Press releases reveal current status of these initiatives. Only recently have they signed on with cutting edge digital partners. The salon segment of their revenue is a mere 7% of their massive $6.2B in revenue, and they project the salon growth at only 3%. Remember the salon is their sustainable competitive advantage. There has been some significant activity by signing Kylie Jenner and launching Cannuka, a CBD skincare brand.
Further analysis reveals more. The bulk of their spend and focus on execution is actually on building new stores. They plan about 80 new locations this year. That’s it-this is the grand total of their execution.
Is this enough???
To recap- Ulta is a $6.2B company, debt free and the largest retailer of its kind-and their biggest growth driver is new stores in strip malls across suburban America.
Again, the question can be asked- is this enough? Is it enough to maintain the #1 status they have enjoyed for so long? Or does doing the same thing they have always done threaten their competitive advantage? Are they doing enough for shareholders, consumers and for the brands they sell?
It can be argued that despite their incredible stock performance, Ulta may not be delivering enough value to shareholders. Seems they have much more capacity to comfortably do more- much, much more.
Ulta has only 1 comfort zone.
They have only 1 revenue and profit source.
Compare this to the competition: Sephora is a part of luxury behemoth LVMH and they benefit from an internal capital market. Department stores also sell fashion goods. Digital only players are proving to not even need a brick and mortar environment.
Ulta only makes money from one source- their product sales. This makes them very vulnerable.
What are Ulta’s strategic options? What more could they be doing?
The answer is simple- create additional revenue and profit streams.
Lever #1– physically expand in Canada (finally). Utla.com has been shipping there for years, service needs improving, and they already have a great foothold. Market entry via franchise also adds the diverse revenue sources via fees and royalties.
Lever #2– there are underutilized assets and space within the salon services area in every store. Give the brands they carry a whole new way to engage customers in real life. Real life experiences are also the ULTIMATE win against Amazon. A co-op style fee for brands to host events, clinics and pop-ups in every store on a regular basis is a marketing win-win for all. This is also another source of revenue and profits. Financial models suggest Ulta could add as much as 30-100 basis point to their market capitalization with this program!
Lever #3– aggressively pursue the all-things-digital initiatives with IoT installations. Sephora is a wonderland in this aspect. Not doing this threatens Ulta’s #1 status. In the digital age, consumer attention is a currency.
Compared to their formidable capacity, Ulta can do so much more for their stakeholders. The 3 Levers described here just scratch the surface. What do you think? What else could Ulta do?