The Opportunity in Beauty

The beauty industry has been showing positive signs of growth and Ulta (NASDAQ:ULTA) is jumping on the opportunity to maintain the rapid growth of their business. According to NPD, the U.S. prestige beauty industry reached $16 billion in 2015, a 7 percent increase over 2014 sales.

-Makeup experienced the healthiest sales growth (13 percent), while the fragrance category outperformed skincare for the first time; fragrance dollars grew by 4 percent and skincare by 3 percent.

-Eyebrows continued to outperform the eye makeup segment, and lip color saw the largest increases within the lip segment.

-Smaller categories like masks, alternative formats such as oil, and paper, as well as hair and sun products are driving growth in skincare.

What Makes ULTA Unique:

-Ulta offers both mass-market and prestige brands and targets the recently company-defined "Beauty Enthusiast" with an enhanced focus on millennials, Latinas, and teens.

-Professional Haircare category with a large selection of products and tools.

-Offers an in-store salon and facials which produces a higher spend and frequency for salon guests Beauty Enthusiasts represent 57% of women and 77% of spend.

Growth Initiatives:

-Store growth: 874 stores in 2015, estimated 974 in 2016. Recent store build-outs at a 100 per year total growth according to management 1400-1700 stores. In 2016, they boasted 20.6 million loyalty program members, with membership rewards, driving customer retention.

-Membership rewards mostly turn into dollars as opposed to gifts like at Sephora. Platinum members get even more perks.

-Social media partnerships with outlets like Pandora radio, Pop Sugar, Refinery29. Continual investment in-store enhancements, Q3- Mgt comp expectations14-15%.

-Ulta is also shifting more focus to mobile, launching a virtual reality try-on segment called Glamlab for its app, as well as Apple Pay.

We belive that Ulta has not only been able to create a product mix that is suitable for a diverse consumer base, but has entered the market with in-store service that allows consumers to further build trust with them.