Ulta's No Good, Very Bad Year

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NEW YORK, United States — Ulta's emails have been hitting inboxes at least daily since early November, rife with emoji and hot pink exclamation points: "EVEN. MORE. DEALS." "Black Friday's STILL going strong." "Up to 50 percent off!"

Ulta is certainly not alone in its frenetic discounting, as retailers of all sorts compete for consumers’ attention during a shorter-than-usual holiday shopping period. But the urgent tone of Ulta’s promotions reflects the chain’s particularly perilous position; the company is attempting to reverse a slide in makeup sales and fend off competition from direct-to-consumer brands as well as Amazon, which is going after the same set of young, value-conscious customers.

The company released its third-quarter results Thursday. Net sales were up almost 8 percent compared to this time last year, a result of strong sales in skin care, hair and other categories. Makeup sales are still in decline.

Few anticipated that Ulta would end 2019 as the underdog. The retailer, which operates over 1,200 stores in the US, was riding high for the first half of the year, thanks to booming sales from Kylie Cosmetics and other exclusive brands. Once seen as a mass-market, pedestrian also-ran to Sephora, Ulta gained a reputation for carrying buzzy influencer-fronted brands, particularly among Gen Z shoppers.

But in August, it missed its earnings target, blaming tanking makeup sales. Tara Simon, the executive who helped Ulta shed its bargain image by bringing in prestige brands like IT Cosmetics, Kylie Cosmetics and Chanel in recent years, left the company in November. Ulta shares, which hit an all-time high of $366 in July, have fallen by one-third since then.

It's not clear why Simon left, but she told CEW, "I'm at a stage in my life and career where I am able to turn the page and look eagerly towards new beginnings. I'm proud of what we've accomplished." Simon did not respond to a request for comment. Ulta declined to comment.

At the heart of Ulta's problem is the makeup sales decline. Ulta derives about 50 percent of its sales from makeup. In the third quarter of this year, industry-wide makeup sales fell 7 percent, while skin-care sales were up 7 percent, according to NPD Group data. In a recent survey of American teenagers by Piper Jaffray, Ulta still topped Sephora. But the same survey concluded those teens bought 21 percent less makeup.

“At a high level, Ulta still remains a destination for beauty purchases,” said Erinn Murphy, an analyst at the bank. “The challenge they’re facing right now is a lot more to do with what’s been happening in the industry.”

Ulta may not be able to depend on Kylie Cosmetics for much longer, either. Coty recently acquired a majority stake in the brand, likely with an eye on broadening distribution, Murphy wrote in a November research note. Ulta offered a 30 percent discount on the brand for the first time this past month.

The challenge they're facing right now is a lot more to do with what's been happening in the industry.

Ulta had a sale misstep in mid-November, when a hyped-up "Beautyfest," in which it would open its stores early and supposedly offer deals, left shoppers disappointed, the New York Post reported. The retailer apologised, though Dillon said on the earnings call that most feedback was positive.

Ulta’s discounts are hefty this season, with some reaching 50 percent, a threshold that can signal deeper problems at a retailer.

“Twenty-five to 30 percent discounts are built into retailers’ pricing. I think when you start to see the 40 to 50 percent discounting, it’s a sign of the … need to really drawback customers into the store or inventory overages,” said Michael Brown, a partner in the consumer and retail practise at A.T. Kearney.

But Ulta is in line with what other beauty retailers, including Sephora and department stores, are doing. They have also been aggressively offering promotions up to 50 percent since before the traditional Black Friday week.

More beauty shoppers are also purchasing online this season, which could account for more dramatic discounting in stores.

“The migration of beauty buying online was noticeable over Black Friday weekend as store level traffic was lower than what we would have expected,” Stephanie Wissink, an analyst at Jefferies, wrote in a note to investors.

Amazon is also a looming threat, offering Lady Gaga's Haus Laboratories line exclusively and increasingly focusing on new house brands. This holiday, it is featuring its Belei skincare brand in a "12 Days of Deals" promotion, which also includes brands that Ulta carries, like Proactiv and Nyx.

Dillon called out Lancome and Clinique for growth in prestige. In mass, the influencer-hyped brands Morphe, Colourpop and Juvia’s Place saw strong sales as well. She noted that while the natural look may be popular, it still requires products.

“We’re still selling a heck of a lot of makeup,” she said.

But skincare is still the real winner. Dillon called out Kylie Skin, Kiehl’s, the Ordinary, Tula and Sunday Riley, among other brands, as strong performers for the quarter.

Some analysts are not optimistic that Ulta can turn makeup sales around quickly; Kylie Cosmetics is a tough act to follow. Wissink wrote that she saw "little by way of mega, multi-unit innovation" in the prestige makeup pipeline for early 2020. Murphy thinks Ulta should continue its strategy of stocking highly desirable new brands, focusing more on skincare. It's done that recently with Millie Bobby Brown's Florence by Mills line.

“I do think it’s hard to pivot on a dime and shift very quickly. But they’re doing what they can,” said Murphy.

THIS WEEK IN FASHION

Glossier is hitting the department store. Though the brand has resolutely kept its business model direct-to-consumer, Glossier is partnering with Nordstrom to offer its fragrance, You, in select stores.

Natura asks Brazil to save the rainforests. The parent company of the Body Shop, Aesop, and soon Avon, says many of its small family ingredient suppliers have been hard hit by raging fires in the region.

Forget about Gen Z and give older people more makeup options. Beauty companies in Japan are actively targeting the over-50 crowd with new products and innovations.

Beauty brands want you to swipe right. Bumble has partnered with brands including True Botanicals and Ouai to market their products on the dating app.

Entrepreneurs are trying to improve traditional beauty school education. Cosmetology schools have been woefully deficient in teaching students skills to survive in the business, but new models aim to disrupt the old ways.

Beauty brands are opting to make more of their products waterless. With global water scarcity a looming problem, formulating without it could be a sustainable solution.

CBD faces scrutiny from the FDA. The US regulatory agency sent warning letters to multiple CBD companies for how it was marketing the substance.

Beauty drama was a top trend of 2019. Reddit just released its annual trend report, which showed that a channel dedicated to hashing out beauty influencer drama grew its subscriber base by over 85 percent.