Narrow-Moat Ulta’s E-Commerce and Brand Strength Have Allowed a Quick Recovery From the Pandemic

We think Ulta Beauty’s brand strength provides a narrow moat and has allowed it to thrive since the worst of the coronavirus crisis, which disrupted its store operations. Over the past decade, Ulta has become the largest specialty beauty retailer in the United States through store openings, product and brand introductions, improved marketing, and an enhanced loyalty program (more than 35 million members). Ulta’s sales have increased to (projected) $8.6 billion in 2021 from $912 million in 2007 as it has opened more than 1,000 stores and its stores have become more productive. Ulta’s success has made it a desirable partner for prestige and niche beauty brands. While the firm faces intense competition and is affected by innovation and product cycles in cosmetics, we think it has developed a following that has allowed it to take share from mall-based stores while competing effectively against wide-moat Amazon and other e-commerce. We believe teen girls and women like to sample products in Ulta’s stores and that its salons, selection, promotions, and service encourage frequent visitation. A recent survey by Teads found that two thirds of women prefer to buy beauty products in physical stores.