The prestige beauty category has been a hot topic for us since 2022, but this year we noted that the outsized growth was set to normalize back to within its long-term range of +4%-6%. From the department stores’ fiscal Q1 2024 results, we again learned that beauty was a strength in their business, especially from Kohl’s where the Sephora at Kohl’s comparable locations grew sales by over 20%.
We’ve also been focused on whether department stores can post a sustained recovery, so Ulta’s results (the retailer that disrupted the prestige beauty retail business in the 2000s) were of particular interest. Ulta total sales were up +3.5% due to contribution from new stores (36 net new locations over the past year to 1,395 total) and e-commerce. Physical-store comps were flattish. Mass skincare and fragrance grew double-digits, whereas prestige skincare and cosmetics declined--that matches what Estée Lauder Companies indicated in their results. Also of note, e.l.f. Beauty (Q1 2024 sales were up 71%) is taking a lot of market share in makeup being known for “value”. Because of e.l.f’s lower price point (versus Estée Lauder’s M·A·C for instance), that works as a sales headwind for Ulta. Lastly, Ulta’s services business (hair treatment, ear piercing, salon cut, etc.) grew high-single-digits demonstrating good consumer engagement with the brand.
Our data (below) shows that Ulta year-over-year visitation data has been very stable since February (2% more locations flatters the growth rate), but the traffic deceleration to Sephora standalone locations is notable. As the deceleration didn’t coincide with an acceleration at Ulta, we doubt that the standalone Sephora’s were impinging on Ulta; instead, it was likely the expansion of Sephora at Kohl’s. Moreover, it seems likely that the Sephora at Kohl’s expansion is now cannibalizing the standalone locations. (See our prior piece on market dynamics where we concluded that something had to give.) Lastly, the trend also aligns with what LVMH (Sephora’s parent) reported for Q1 2024; we wrote about that and the 2024 dynamics here.
On its positioning and initiatives, Ulta CEO Dave Kimbell shared, “Today, there are significantly more places to buy beauty, especially prestige beauty, with more than 1,000 new points of distribution opened in the last two years (i.e., Sephora at Kohl’s). Additionally, prestige brands are expanding their online availability as digital penetration grows in the category (i.e., Amazon). As a result, our market share has been more challenged for the last few quarters, particularly within the prestige beauty category...[We] lost share in prestige beauty primarily driven by pressure in makeup and hair. This prestige share pressure was concentrated in stores as we increased share in e-commerce for the quarter. Given our proven ability to engage our guests and lead the industry, I am confident we can reinvigorate market share gains...I want to highlight actions we are taking now to leverage our traffic growth, increase conversion and accelerate top line growth. Our plans are focused on five key areas: strengthening our assortment, accelerating our social relevance, enhancing our digital experience, leveraging our world-class loyalty program, and evolving our promotional levers.
- We are enhancing our assortment with the addition of highly recognized brands as well as emerging and exclusive brands. This year, our brand pipeline includes more than 25 new brands, including many exclusive to Ulta Beauty. Importantly, this year's pipeline includes a balanced mix of category growth-driving brands like Sol de Janeiro and Charlotte Tilbury and emerging exclusive brands like WYN, a makeup brand developed by Serena Williams and Orabella, a fragrance brand developed by Bella Hadid. To support stronger growth of our core assortment, we plan to accelerate growth with key exclusive brands...We plan to expand key growth driving brands into more stores, and we are excited to relaunch the Ulta Beauty Collection this summer. Additionally, we intend to leverage our marketing and social capabilities to lean into emerging trends, amplify key growth brands, and drive relevance and engagement, and activate new trend-focused events across all our channels.
- Social media is amplifying and accelerating beauty. Social relevance is the gateway to customer reach, connection and engagement and relevance to drive sales and loyalty. While we have increased our EMV and share of voice across key platforms, including TikTok and Instagram, we see further opportunity to ensure we are at the heart of the social and cultural conversation for beauty. To accelerate our social relevance, we will scale our creator network, amplify brand networks and collaborations, and use our platforms to showcase our unique assortment.
- With the completion of our digital store transition, we are increasing our focus on leveraging new capabilities and optimizing the guest experience to accelerate traffic, drive conversion and increase average ticket. We recently expanded our partnership with DoorDash with our launch on DoorDash marketplace, which extends our unique assortment to the more than 70 million active users of the DoorDash app. We will introduce new digital buying guides that amplify search engine optimization while providing guests with educational content, beauty tips and product recommendations. We will improve the path to purchase through guided navigation and leverage new innovative search capabilities to facilitate discovery. And we will accelerate app adoption through targeted communication and offers as app users spend nearly 2x more. In the first quarter, our app accounted for 57% of our e-commerce sales, up more than 450 basis points compared to last year.
- Our loyalty program is a powerful strategic asset, and we will lean into this platform to drive greater engagement and support top line growth. Earlier this year, we rebranded the program to Ulta Beauty Rewards, enhanced the birthday experience and launched a refreshed look in stores, online and across social. These improvements are driving greater awareness and deepen connections with our members. We have also introduced new mobile POS capabilities to engage existing members and drive new member acquisition. And we are testing new ways for guests to engage with loyalty benefits in store transactions. At the same time, we are leaning in to amplify the value of the program through member love events and social engagement...(For the quarter, membership increased by +200K.)
We have a strong plan in place to navigate near-term pressures while continuing to invest in support of the long-term opportunity. I am confident in the power of our differentiated business model and our team's ability to execute with excellence against our priorities and deliver value for our shareholders. Ulta Beauty is a force in the beauty industry as we captured a large share of this dynamic category, and I am as optimistic as ever about the future of our business.”
