Inside Ulta Beauty’s Turnaround Plan

Gen Alpha beauty shoppers may be known as “Sephora tweens,” but Ulta Beauty is betting that it’s not too late to win their loyalty.

Younger shoppers are at the heart of the retailer’s plans to return to growth, which executives unveiled on Wednesday at its annual Investor Day event in Chicago. The beauty retailer has faced a tough 2024 so far: In August, Ulta Beauty revised its sales outlook for the year, anticipating that 2024 sales would remain flat — or even slightly decline — against last year’s performance, when sales reached $11.2 billion. That guidance was reiterated at Wednesday’s event; the company also stated that 2025′s comparable sales growth is still expected to be below the long-term target of 3 to 4 percent, said CFO and treasurer Paula Oyibo.

“We have a clear understanding of what impacted our first-half performance, and we’re taking actions to reinforce our position and boost our performance,” said CEO Dave Kimbell.

Meanwhile, rival Sephora has been a standout performer for parent company LVMH, driven in part by the retailer’s resonance with younger shoppers. That’s just one of several headwinds Ulta is facing. Sephora has been moving further into Ulta Beauty’s suburban territory through its Kohl’s shop-in-shops, leading to what Kimbell called an “unprecedented expansion of points of distribution” at a time when the beauty industry’s post-pandemic “normalisation” has also contributed to slower spending.

Looking ahead, brick-and-mortar improvements are a focal point, including merchandising and optimising the store experience to stay relevant with Gen-Z while also drawing in Gen Alpha. And Ulta Beauty must contend with a beauty landscape where it must compete not only with Sephora, but also Amazon, which has been increasingly moving into prestige beauty. CMO Michelle Crossan-Matos emphasised that Ulta Beauty needs to create a “beauty destination for a lifetime,” noting the high stakes of getting the younger generation of shoppers on board — the spending habits they’re making now could continue into adulthood.

The key steps for a turnaround, said Kimbell, will include strengthening its product assortment, improving the customer experience, leveraging its loyalty program and evolving its social and promotional strategies.

Gen-Z and ‘Sephora Tweens’

Ulta Beauty has experience winning over younger shoppers — when Gen-Z was first coming into its spending power, it emerged as their primary beauty buying destination. From 2013 to 2023, its rapid expansion in the US resulted in a 15 percent compound annual growth rate, and it was frequently ranked as the number one beauty retailer on Piper Sandler’s biannual “Taking Stock With Teens” survey.

Now, it needs to fight to win over a Sephora-obsessed Gen Alpha, who have been attracted to Sephora’s luxe shopping experience and candy-coloured displays of influencer-favourite brands like Drunk Elephant, Sol de Janeiro, Glow Recipe and Glossier. (Sephora was listed as the top beauty retailer in the past two Piper Sandler surveys, including the fall edition that was published just a few weeks ago.)

Throughout Wednesday’s presentation, “Gen Alpha” was mentioned multiple times as executives went through merchandising and store strategies to win them over.

“Consumers are engaging in their beauty journey earlier in their lives than ever, which drives opportunity to create lasting loyalty and sets the category up for sustained growth,” said Kimbell onstage at the event.

According to a TD Cowen research note downgrading Ulta Beauty by analyst Oliver Chen, “the company needs to fiercely compete for new brands and negotiate for exclusives,” as well as invest in brand incubation. On that front, chief merchandising officer Monica Arnaudo highlighted a mix of new brand launches meant to cater to younger shoppers, including former Sephora exclusives like Sol de Janeiro, whose tropical-scented lotions and fragrances have a rabid teen fanbase; Rihanna’s Fenty Beauty and TikTok favourite Charlotte Tilbury, as well as new Ulta Beauty exclusives like luxury fashion label Rabanne’s new beauty line and influencer Dani Austin’s hair care brand Divi.

“We are already seeing a younger demographic in stores and expect that to continue,” Arnaudo said, adding that the retailer is investing in categories that Gen Alpha is particularly interested in, like body spray, as well as securing more exclusives — there are 40 brands in the pipeline for 2025.

Last month, Ulta Beauty also announced the launch of Mini Brands, dollhouse-size toy versions of its products that are sold in egg-like balls that are cracked open to reveal a surprise, meant for younger shoppers to buy and trade with friends. Arnaudo noted onstage that Gen Alpha is “obsessed” with the collectible toys, which can “drive more visits and trips” to stores.

Specialty Beauty’s Turf War

Beyond merchandising, another key aspect will be the physical store experience — tween shoppers may be young, but they’re already showing a preference for premium retail settings.

This is especially crucial as Sephora stores have quickly opened up near Ulta Beauty locations. Historically, the two have mostly operated on their own respective turfs, with Sephora in more traditional mall settings and Ulta Beauty in suburban strip malls. But since Sephora in 2020 inked a shop-in-shop partnership with Kohl’s — often an Ulta Beauty neighbour, with 92 percent of Kohl’s stores in strip malls or freestanding locations — that line has been blurred. Sephora has also opened more freestanding stores across the midwest and south. Kimbell said that over 80 percent of stores have been impacted by nearby “competitive openings” in “recent years”

“We actually feel good about the way we’ve been able to manage through this, continuing to drive our business growth,” said Kimbell, citing the company’s loyalty program membership and strength in prestige, skin, and prestige fragrance as well as its existing brand awareness.

But to address the threat more directly, Ulta Beauty plans to pursue more rapid store expansion, announcing plans to open approximately 200 new stores in the next three years. Beyond its traditional settings, it is looking to expand into smaller cities with no existing specialty beauty retailers such as Wilson, North Carolina. It’s also thinking globally, with Mexico set to be the site of its first international expansion in 2025.

To improve the store experience, Kecia Steelman, Ulta Beauty’s president and COO, said that the company plans to “elevate” the shopping experience, hyping up omnichannel shopping. It will invest $692 million in its physical stores in the coming year, which, beyond new openings and relocations, which also include remodels of existing properties to the number of shops offering services like hair and brow appointments, as well as in-store events.

Amazon Looming

Sephora may be the source of many of Ulta Beauty’s problems, but Amazon’s investment in beauty is also cause for concern, particularly as it onboards more prestige beauty brands.

“Amazon is probably the biggest headwind to everybody that’s not Amazon now,” said Jon Tenan, a managing director at investment bank Baird. “Historically, until a year or two ago, they were not carrying anything close to prestige, and barely even masstige. Everybody else would say, ‘That’s a death knell to your business if you go there.” Now, “it is certainly eating into all of these retailers.”

To grow its assortment and compete with Amazon’s endless options, Ulta Beauty will use its e-commerce platform as a testing ground for new brands, said Arnaudo, even as it continues to optimise its store space to evolve its assortment.

Online, she said, “we have the ability to expand further” beyond the roughly 600 brands it stocks now — a split of about 70 percent prestige and 30 percent mass.

Kimbell noted that assortment, exclusivity, experience, and online-offline features like buy online, pick up in-store are “what will allow us to win in that space.”

“What you need to be as a retailer is offering something different,” said Tenan. “It leans on experience, because that’s the thing Amazon doesn’t offer and doesn’t care to. They’re not going to have in-store curation. There’s always a place for that within beauty and within retail. As you move higher-end, that becomes increasingly true.”