Ulta Beauty’s CEO on how she plans to keep up its explosive growth

Vic Moss/Moss Photography Photo By MossPhotography.biz

Not many retailers have been spared from having to close stores in these years of consumer doldrums and exploding e-commerce.

Yet, not only has Ulta Beauty (ULTA) bucked that trend, but on the contrary, the beauty store chain has been aggressively increasing its store fleet: the retailer now has about 715 shops, more than double the number five years ago, with plans to reach 1,200 locations in another five years.

Ulta has deftly turned itself into the top specialty beauty retailer by outmaneuvering the competition with a simple formula: combining what shoppers can find separately at those retailers, along with salon services, under one roof.

For instance, Ulta offers salon services and higher-end products that mass market chains like Wal-Mart Stores (WMT) don’t, beauty advisors one doesn’t find at Walgreens (WAG) or CVS/pharmacy (CVS) and a more affordable, and complete, assortment of products than at department stores like Macy’s (M) or Nordstrom (JWN).

The results speak for themselves: Ulta reported comparable sales grew 9.2% in the first half of the current fiscal year. Wall Street expects total sales to reach $3.19 billion for the fiscal year ending in February, nearly three times 2009 sales levels.

Ulta CEO Mary DillonCourtesy: Ulta
Courtesy: Ulta

CEO Mary Dillon, former chief of U.S. Cellular and senior executive at McDonald’s (MCD) and PepsiCo (PEP), laid out the broad outlines of a five-year plan last month that she will flesh out at Ulta’s investor day on Wednesday. She plans to, among other things:

* open some 100 stores per year
* raise e-commerce to 10% of sales from 4% now
* aim for comparable sales growth of 5-7% a year

Ulta will benefit from continued grow in the beauty sector, which has grown 2.3% a year in the last five years according to IBIS World. But at the same time, it is also facing a lot of competition: Kohl’s (KSS) is rolling out new, full-fledged beauty departments with top brands, while J.C. Penney (JCP) is expanding the Sephora beauty shops within its stores and upgrading its beauty salons.

Dillon, CEO since mid-2013, spoke to Fortune in an exclusive interview ahead of the investor day about how she plans to maintain Ulta’s edge.

What gap in the beauty retail market is Ulta filling to sustain these growth projections?

“We are really the only beauty retailer where you can buy across multiple categories—color cosmetics, skincare, professional haircare, fragrance – but in addition, we’ve got a salon in every Ulta”

“It’s really a place where a woman can get all of her beauty needs met. No one else offers all those products and experiences in one place.”

Coty (COTY) and Elizabeth Arden (RDEN) have each said that sales have been hurt by a mass retailer (which Wall Street analysts took to mean Wal-Mart) pulled back on orders- does that represent an opportunity for Ulta?

“Ulta is a great place for our vendor partners to experience growth.”

“It does provide a platform for us to have a diversified portfolio which helps balance risk of any one product or category and for vendor-partners, we do provide an great opportunity for growth.”

Ulta has been ramping up its assortment of so-called prestige (upscale) products, and has been rolling out boutiques for high end brands like Lancôme and Clinique at 100 stores. Why?

“There’s a lot of innovation and creativity in prestige and we find our guests are responding to that.”

Ulta has chosen to locate its stores primarily in power centers rather than malls. Why?

“Our guest likes the convenience of being able of drive up to the store and not necessarily walk through a mall to find Ulta. This kind of shopping has been trending for some period of time.”

Ulta is experimenting with two small format stores—5,000-square feet in size in smaller towns rather than the typical 10,000-square feet for a typical Ulta. How will those stores be different?

“Women in the U.S. are influenced by the same trends—popular culture, runway trends etc, and our hypothesis is that she’s quite anxious to be able to buy products in her town that perhaps she’s hasn’t been able to in the past.”

“It is really everything Ulta does, all things beauty all in one place, but in a smaller place.” (There is a salon in these stores along with a facial in the Dermologica area.)

Despite its growth, Ulta is still relatively unknown in some parts of America. Is that an opportunity?

“Our awareness gap, and the fuzziness about how people might understand Ulta today is a ripe opportunity for us as we think about going forward. I imagine this is like almost relaunching the brand of Ulta.”

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