GlobalResearch

26August2019

Ⅷ

U.S.BeautyRetail

UBSEvidenceLabinside:What'sHappeninginBeautyRetail,2Q'19

Who'spositionedtogainfromBarneys'bankruptcy?

ThechallengesatBarneysserveasanotherreminderofhowretailerslikeULTAaregainingshareattheexpenseofothers.Approximately18%ofBarneysstoreshaveanUltalocationwithin5mins,while68%haveonewithina10mindrive.Further,thebiggestopportunitymaybeforretailerstostartcarryingbrandspreviouslyexclusivelysuppliedatBarneys.ForthefullBarneyschain,64%haveaSephoraina5mindrive.Inaddition,41%haveaNordstromand32%haveaMacy'sina5mindrive.

WeaksalestrendspersistedatJCPenney,whichlikelyaidedothers

JCPreporteda-9%compin2Q'19(-6%ingo-forwardcategories).OftheJCPstoreswithaSephora,59%haveanUltawithina5mindrive&78%haveonewithina10mindrive.Thisisup100bpsfrom1Q'19.Thus,ULTAisprobablytakingshare.Also,45%haveaMacy'swithina5mindrive.Only20%haveaSephoracompanyownedstorewithina5mindrive,suggestingit'sprobablynotrecapturingmuchlostsales.

Ourpricingsurveyfoundthespecialtybeautypricingenvironmentstable

Wereviewedpricesfor275topULTAproducts(asofJuly25)&otherretailers.Thekeyconclusionwasbeautypricingremainsrationalinthespecialtychannel.OnexactSKUmatcheswithULTA,Sephora'spriceswere0.1%moreexpensive(consistentwithApr),JWNwas-0.1%cheaper(in-lineinApr),&Macy'swas6.5%moreexpensive(-0.2%cheaperinApr).Wethinkthecompetitiveenvironmenthasbeensubduedinthespecialtybeautyanddepartmentstorechannelaspricingwasstablewithpriorperiods.

ManyofULTA'stopproducts&newitemsarenotavailableelsewhere

For175top-sellinggoodsatULTA,only51%wereavailableatM(49%inApr),38%atSephora(45%inApr),&22%atJWN(35%inApr).ThissuggeststheproductsdrivingUlta'ssalesarefrequentlynotavailableelsewhereinthespecialtybeautychannel.Inmass,39%weresoldatAMZN1P(42%inApr),29%atWMT1P(29%inApr),&18%atTGT(15%inApr).ThishighlightsthatmanyofUlta'sproductsareexclusivetothespecialtybeautychannel.Together,wethinkthesefactorsinsulateULTAfromcompetition,whichshouldsupportitssamestoresalesgrowth.

Equities

Americas

Retailers,Broadline

MichaelGoldsmith

Analyst

michael.goldsmith@+1-212-7132951

MichaelLasser

Analyst

michael.lasser@+1-212-7132440

JaySole

Analystjay.sole@+1-212-7133559

StevenStrycula

Analyst

steven.strycula@+1-212-7131428

PinarErgun,CFA

Analyst

pinar.ergun@+44-20-75686885

GustavoPirasOliveira,CFA

Analyst

gustavo.oliveira@+55-11-35136520

JulieZhuang,CFA

Analyst

julie.zhuang@+44-20-75671888

MWMT3PAMZN3PAMZN1P SephoraWMT1PJWN

TGT

SBH

Sephoraoffered38%of

ULTA's175top-selling

products

Figure1:ULTAtopproductsavailableatotherretailers

46%

39%38%

51%48%

29%

7%

22%18%

0%10%20%30%40%50%60%

Source:UBS

Figure2:ULTApricesrelativetoothersonLFLitems

20%

10%

0%

-10%

-20%

-30%

-40%

6%

0%

0%

-2%

-5%

-11%

-8%-10%

-23%

ULTA'spricesweregenerallyonparwithSephoraandNordstrominourmostrecentpricingsurvey

.

Macy'swaspricedatpremiumtoULTA

AMZN3P

WMT1P

WMT3P

SephoraMJWNSBHTGTAMZN

1P

Source:UBS

/investmentresearch

ThisreporthasbeenpreparedbyUBSSecuritiesLLC.ANALYSTCERTIFICATIONANDREQUIREDDISCLOSURESBEGINONPAGE49.UBSdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.

U.S.BeautyRetail26August2019Ⅷ2

TableofContents

?KeyTakeawaysPaee3

-Takeaway#1–WfooterlanswitfJCPelley/Senforastores?Paee4

-Takeaway#2–WfooterlanswitfBarleysNewYorkstores?Paee5

-Takeaway#3–ProbsatoterlanwitfULTAismalaeeablePaee6

-Takeaway#4–Cosmetiasstoresalesaaaeleratebil2Q'19Paee7

-Takeaway#5–SenforafasalareersoaialmebianreselaePaee8

-Takeaway#6–KylieCosmetias&MornfefatemalyfollowersPaee9

?MolitoriletfePriaileCltirolmelt–UBSCtibelaeLabPriaileIltellieelaePaee10

?MolitoriletfePriaileCltirolmelt–BeastyRetailPriaile&AtailabilityPaee12

?MolitoriletfeStoreLalbsaane–UBSCtibelaeLabStoreOterlanPaee19

?MolitoriletfeStoreLalbsaane–UBSCtibelaeLabDemoeranfiasPaee31

?MolitoriletfeStoreLalbsaane–UBSCtibelaeLabReeiolalCxnossrePaee34

?Annelbix1:MetfoboloeyPaee35

2

U.S.BeautyRetail26August2019Ⅷ3

Seatiol1

KeyTakeaways

U.S.BeautyRetail26August2019Ⅷ4

Takeaway#1–WhooverlapswithJCPenney/Sephorastores?

SenhopaSW?SSropeOteplanMarpiv

SephoraSWAS5Minutes10Minutes15Minutes10Minutes

JCPenney98%100%100%100%

?JCPelleyaoltilsestostrseeleilaafaleile

BathBodyWorks

87%

93%

95%

98%

LancomeSWAS

85%

90%

94%

98%

CTS

80%

97%

97%

98%

BareCscentualsSWAS

70%

79%

83%

91%

UrbanDecayCosmeticsSWAS

69%

74%

78%

85%

retaileltirolmelt.Itexneatsaaomnbealileof7#-8#il2019.AsssafweleteraeebUBS

SallyBeautySupply66%96%99%100%

CtibelaeLabbatatoibeltifytfosewitfeletatebletelofstoreoterlanwitfSenforastoreswitfilastoreatJCPelleyloaatiols.

Target64%89%93%95%

Walgreens61%94%98%98% UltaBeauty59%78%88%94% MACCosmeticsSWAS50%54%63%77%

Macy's45%49%56%69%

Kohl's43%72%87%94%

AvedaSWAS39%70%82%92%

MerleNormanCosmetics23%41%54%77%

Sephora

21%

28%

36%

59%

KiehlsSWAS

20%

25%

35%

60%

KerastaseSWAS

13%

32%

43%

66%

LUSH

11%

15%

21%

45%

BareCscentuals

11%

13%

19%

38%

Aveda

8%

11%

19%

40%

MACCosmetics

7%

10%

15%

39%

TheBodyShop

7%

9%

14%

31%

LOCCITANCSWAS

7%

9%

14%

35%

?SenforastoreswitfilastorefatealeletatebexnossretoULTA.Ata10milstebritetime,78#ofSenforastoreswitfilastoreaomneteswitfalULTAstore.Tfislsmberrisesto88#wfelaolsiberilea15milbritetime.

?RelatitetotfeDenartmeltStores,56#of

Senforastoreswitfilastoreaomnetewitfa

Nordstrom6%9%14%33%

Maay'salb14#ofSenforastoreswitfilastoreaomnetewitfaNorbstromwitfila15milstebritetime.

LOCCITANC6%9%16%40%

ArmstrongMcCall5%15%18%19%

Perfumania

5%

7%

12%

29%

SaksOffFifth

3%

5%

12%

33%

Kiehls

2%

3%

6%

22%

Bloomingdale's

2%

2%

4%

12%

LouisTuittonInternational

1%

2%

5%

23%

LouisTuittonInternationalSWAS

1%

2%

3%

13%

UrbanDecayCosmetics

1%

1%

1%

3%

SaksFifthAvenue

1%

2%

3%

13%

Bluemercury

1%

4%

9%

28%

BarneysNewWork

0%

1%

1%

6%

BergdorfGoodman

0%

0%

0%

0%

?SenforastoresfaaebireataomnetitiolfromSallyBeasty.96#ofSenforastoreswitfilastore

aomnetewitfSallyBeastyata10milstebritetime.Tfeoterlanrisesto99#wfelaolsiberilea15milstebritetime.

4

Source:UBSCvidenceLab

U.S.BeautyRetail26August2019Ⅷ5

BarneysNewYorkStoreOverlapMatrix

Takeaway#2–WhooverlapswithBarneysNewYorkstores?

Nodstrom5Minutes10Minutes15Minutes10Minutes

BareCscentualsSWAS73%82%95%100%

?TfeafalleleesatBarleysserteasalotferremilberoffowretailerslikeULTAare

LOCCITANC73%77%82%95%

CTS68%95%95%100%

LancomeSWAS68%77%91%100%

AvedaSWAS68%77%86%95% Sephora64%64%77%95% KiehlsSWAS59%59%73%86%

MACCosmeticsSWAS55%68%82%95%

KerastaseSWAS55%64%77%95%

MACCosmetics55%55%73%86%

BathBodyWorks50%82%95%100%

SaksOffFifth45%73%82%95%

LUSH45%50%59%86%

eaililesfareattfeexnelseofotfers.

?BarleysNewYorkfasreaeltlyfillebfor

balkrsntayalbisexneatebtoalosemostofits19loaatiols.AsssafweleteraeebUBSCtibelaeLabbatatoibeltifytfosewitf

eletatebletelofstoreoterlan.

Walgreens

41%

86%

95%

100%

UrbanDecayCosmeticsSWAS

41%

68%

91%

100%

Kiehls

41%

55%

59%

77%

Bloomingdale's

41%

55%

59%

68%

TheBodyShop

41%

45%

59%

77%

?BarleysNewYorkstoresfatealeletateb

exnossretoSenfora.Ata5milstebrite

time,64#ofBarleys'storesaomnetewitfa

41%

55%

82%

Nordstrom

41%

LouisTuittonInternationalSWAS36%41%45%59%

Aveda36%36%59%77%

Target32%86%91%100%

Macy's32%59%73%100%

Senforastore.Tfislsmberrisesto77#wfelaolsiberilea15milbritetime.

LOCCITANCSWAS32%45%68%82%

?Barleysfaaesrelatitelymobestletelsof

LouisTuittonInternational

32%

41%

45%

64%

Perfumania

32%

36%

41%

68%

BareCscentuals

32%

32%

36%

55%

SaksFifthAvenue

27%

27%

45%

55%

Bluemercury

23%

45%

55%

82%

UltaBeauty

18%

68%

86%

100%I

aomnetitiolfromULTAata5milstebrite

SallyBeautySupply18%68%91%100%

JCPenney

5%

18%

41%

86%

SephoraSWAS

5%

18%

41%

86%

Kohl's

5%

9%

45%

95%

BergdorfGoodman

5%

5%

9%

14%

MerleNormanCosmetics

0%

0%

18%

64%

ArmstrongMcCall

0%

0%

0%

0%

UrbanDecayCosmetics

0%

0%

0%

0%

timeasolly18#ofitsstoresarealosetoalULTAattfisbritetime.Tfosef,itilareasesto68#ata10milstebritetime,alb86#ata15milstebritetime.

?RelatitetotfeDenartmeltStores,41#ofBarleys'storesaomnetewitfaMaay'salb32#ofBarleys'storesaomnetewitfa

Norbstromwitfila5milstebritetime.

5

Source:UBSCvidenceLab

U.S.BeautyRetail26August2019Ⅷ6

Takeaway#3–ProductoverlapwithULTAismanageable

?IltfeAsesst2019ebitiolofosrnriailessrteyof175ton-sellilenrobsatsatULTA,malyitemsbritileULTA'ssaleswerel'tatailableatotferretailers.TfisfieflieftstfatULTAiswellilsslatebfromaomnetitiol.

-Forexamnle,olly51#wereatailableatMaay's,38#wereatailableatSenfora,alb22#wereatailableatNorbstrom.

-Similarly,olly39#wereatailableatAmazol1P,29#wereatailableatWalmart1P,alb18#wereatailableatTareet.

?Similarly,ULTAiswellnositiolebilitskeyaateeory,makesn(aosmetiasrenreselteb51#ofitstotalsalesilFY'18).Also,itston25makesnSKUsoterlanwitfotferretailersfasaomebowlsilaeosrlastssrtey.

-72#wereatailableatMaay's(ts.80#ilAnr2019),68#atSenfora(ts.64#ilAnr2019),wfile40#atJWN(ts.56#ilAnr2019).

-Atailabilitytfroseftfemassafallelaoltilsestobelimiteblimiteb.Olly4#wereatailableatAMZN1PalbWMT1Peaaf,wfileloleatTGT.

ULTA25Top-SellingMakeupProductsAvailableatOtherBeautyRetailers

51%48%

MWMT3PAMZN3PAMZN1P SephoraWMT1PJWN

TGT

SBH

%

46%

39%

38%

\

Sephoraoffered45%ofULTA's

175top-sellingproducts

29%

22%18%

7%

ULTA175Top-SellingProductsAvailableatOtherBeautyRetailers

AMZN3P MSephoraWMT3PJWN

88%

carriedakeupTnone

%

80%72

80

%

68%

68%

dWMT1Peach25top-sellingmULTA,whileTG

64

40%

52%

56%

AMZN1Panonly4%ofproductsat

WMT1PAMZN1PTGT

4%

8%

124%

0%

0%

SBH

0%

0%

0%20%40%60%80%100%Jul25,2019Apr24,2019

0%10%20%30%40%50%60%

6

Source:UBS

U.S.BeautyRetail26August2019Ⅷ7

Takeaway#4–Cosmeticsstoresalesacceleratedin2Q'19

?Sneaifiaally,SnelbTrelbbollartolsmeerowtfataosmetiasstoresilareaseb4.3#year-oter-yearbsrileULTA's2Q'19,alimnrotemeltfrom3.2#il1Q'19.

?Also,tfebatailbiaatestfeaateeorystartebstrolewitfa5.3#ilareaseilMayalb4.9#erowtfilJsle.Bst,trelbsslowebalittleilJslytoa2.8#ilarease.

?Tferefasbeelal85#aorrelatiolbetweelULTA'sosarterlysamestoresalesalbbollartolsmeerowtfafaleeilaosmetiassilae2Q'14.

DollarVolumeGrowthCosmeticStoresvs.ULTAQuarterlyComp

18.0%15.0%12.0%9.0%6.0%3.0%0.0%

3Q'144Q'141Q'152Q'153Q'154Q'151Q'162Q'163Q'164Q'161Q'172Q'173Q'174Q'171Q'182Q'183Q'184Q'181Q'192Q'19C——CosmeticsStoreSpendTrend(LHS)——ULTAComp(LHS)

Source:Bloomberg,Companyreports,UBSCstimates7

U.S.BeautyRetail26August2019Ⅷ8

Takeaway#5–Sephorahasalargersocialmediapresence

?UBSEvidenceLabhascollectedinteractiondatafrom1,000+brandpagesthathave2+millionpostsandacombined30+billioninteractionstounderstandrecenttrendsinpopularityonInstagram.

?SephorahasalargerfollowingonInstagramthanUlta.

?Onaverage,Ultareceivesaround1.5mmlikeseachweek.Sephoragetssignificantlymorelikes,includingapproximately~8mminJuly.Though,itisworthnotingthatSephorahasseenameaningfuldecelerationinthismetricsinceitspeakinApril.

?Atthesametime,Sephora'svideosonInstagramareconsiderablymoreoftenwatchedthanUlta's.Thatsaid,thismetrichasbeenvolatile.

?GivenUlta'slargerstorefootprint,wethinkthishighlightsanopportunityforUltatoimproveitsengagementthroughthischannel.

WeeilwlskbepodliiesolIlsraepakWeeilwtibeotiewsolIlsraepak

8

Source:UBSCvidenceLab

U.S.BeautyRetail26August2019Ⅷ9

Takeaway#6-KylieCosmetics&Morphehavemanyfollowers

?KylieCosmetiasalbMornfeareamolemorenonslaralberowilebralbsatUlta.WeleteraeebUBSCtibelaeLabbatatoseefowtfesebralbsfatebeeltrelbileolIlstaeram.

?KylieCosmetiasisterynonslarolIlstaeram.AsofJsly,KylieCosmetiasreaeitebalateraeeof14mmlikesweekly.

?MornfealsofasalareeIlstaeramfollowile.Tfebralbreaeiteslearly5mmolaweeklybasis.Ilterestilely,trelbsfateslowebbowlreaeltlyforbotfbralbs.

?Also,KylieCosmetiasrelatebtibeosarewatafebmoreofteltfalMornfe's.

WeeilwlskbepodliiesolIlsraepakWeeilwtibeotiewsolIlsraepak

Source:UBSCvidenceLab9

U.S.BeautyRetail26August2019Ⅷ10

Seatiol2

MonitoringthePricingEnvironment–UBSEvidenceLab

PricingIntelligence

ULTA'slike-for-likeSKUspricingwaslowerthanlastyear

?UBSCtibelaeLabnriaeiltellieelaefartestebbeastynrobsatofferilesfromlearly30retailerwebsitesaaross7aosltriessilaeOatober2015.Tfebatabaselowtotalsoter33milliolreaorbs.Olessefortfebatabaseistobetermiletrelbsilyear-oter-yearnriaile.

?DsriletfemoltfsofULTA's2Q'19,itsnriaileollike-for-likenrobsatswas-0.4#loweryear-oter-year.Ilnartiaslar,itsnriailewasbowl-0.4#ilMayalbbowl-0.5#ilJslealbJsly.

?Foraomnarisol,like-for-likebeastynriailebsriletfesameneriobwassn2.2#atNorbstrom,albsn0.7#atMaay's

?ForAmazol,nriaileollike-for-likeSKUswasbowl-0.7#.Sneaifiaally,itwasbowl-1.0#ilMay,-0.4#ilJsle,alb-0.3#ilJsly.

Liie-dop-LiieWeap-Otep-WeapBeasrwPpiaeTpelb

4.0%3.0%2.0%1.0%0.0%-1.0%-2.0%-3.0%-4.0%-5.0%

ULTA'ssameSKUpricingwas-0.4%loweryear-over-year

duringits2Q'19.Amazon'spricingwasalsodown,while

NordstromandMacy'spricngwasupduringthesameperiod

Nordstrom

Macy's

Amazon

ULTA

U.S.BeautyRetail26August2019Ⅷ11

Nov-17Dec-17Jan-18Feb-18Mar-18Apr-18May-18Jun-18Jul-18Aug-18Sep-18Oct-18Nov-18Dec-18Jan-19Feb-19Mar-19Apr-19May-19Jun-19Jul-19

Source:UBSCvidenceLab11

U.S.BeautyRetail26August2019Ⅷ12

Seatiol3

MonitoringthePricingEnvironment–BeautyRetailPricing&

Availability

U.S.BeautyRetail26August2019Ⅷ13

WhatistheproductoverlapwithULTA?

?ToassessnrobsatoterlanbetweelULTAalbotferbeastyretailers,weretiewebtfeton25best-sellile

nrobsatsolULTA'swebsiteaaross7aateeoriesaswellas100lewarritalsasofJsly25,2019.Weaomnarebtfislistof275nrobsatstotfewebsitesofotferretailersforatailabilityalbnriaile.

-ULTA'soterlanwitfWalmart1PalbAmazol1PiltfeMakesnaateeoryremailslimiteb.BotfWalmart1PalbAmazol1PaarriebollyolemakesnitemfromULTA'ston25iltfeaateeory(4#).

-Similarly,Walmart1PalbAmazol1PfatelittleoterlanwitfULTA'sNewArritalsaateeory.Sneaifiaally,Walmart1Paarriebolly3,wfileAmazol1Paarriebolly9ostof100ULTA'sNewArritals.

-Attfesametime,SenforafaslimiteboterlanwitfULTAiltfeNailsalbNewArritalsaateeories.Sneaifiaally,loleofULTA'ston25nrobsatsiltfeNailsaateeorywasatailableatSenfora,wfileitoffereb19ofULTA's100lewestitems.

ULTATop-SellingProductsAvailableatKeyBeautyRetailersbyCategory(July25survey)

Sephora

M

JWN

SBH

TGT

AMZN1P

AMZN1P

WMT1P

WMT1P

Makeup

68%

72%

40%

0%

0%

4%

88%

4%

68%

Nails

0%

8%

0%

44%

28%

52%

16%

20%

56%

Skincare

52%

32%

20%

0%

24%

24%

68%

24%

52%

Haircare

4%

40%

8%

0%

24%

56%

40%

44%

40%

Fragrance

80%

92%

60%

0%

0%

52%

40%

48%

48%

BathandBody

20%

40%

8%

0%

36%

36%

40%

20%

24%

Men

40%

72%

20%

8%

12%

52%

32%

40%

48%

NewArrivals

19%

12%

20%

0%

3%

9%

27%

3%

19%

Source:Companyreports,UBS13

U.S.BeautyRetail26August2019Ⅷ14

WhatisthehistoricalproductoverlapwithULTA?

?Otertfelilessrteyiteratiols,Senforafasaolsisteltlyaarriebabost40#ofULTA'ston175nrobsats,ilalsbile38#iltfelatestebitiol.Tfismaysseeesttfattfere'selosefroomforbotfretailersto

onerate,eteltfosefbotfaomneteiltfesneaialtyafallel.

?WfileMaay'sfasbeelaarryilemoreofULTA'stonnrobsats,Norbstrom'soterlanfasbealilebreaeltly.Sneaifiaally,Maay'saarrieb51#,wfileNorbstromoffereb22#oftfebestsellileitemsatULTAilJsly25ssrtey.Tfisaomnaresto49#alb35#,resneatitely,lastosarter.

?ULTA'stonnrobsatsofferileatAmazol1Pfasbeeltolatiletfroseftfefistoryofosrssrtey.Iltfelatestebitiol,Amazolaarrieb39#ofULTA'ston175nrobsats,aomnarebto42#ilAnril2019alb36#il

Sentember2017.Senarately,Walmartoffereb29#ofULTA'stonnrobsats,illilewitftfenretiossebitiolalbsnfrom17#ilosrfirstiteratioloftfessrtey.

60%

51%

48%

50%

46%

39%

38%

40%

29%

30%

22%

18%

20%

7%

10%

ULTATop-SellingProductsAvailableatOtherKeyBeautyRetailers

0%

SephoraMJWNSBHTGTAMZN1PAMZN3PWMT1PWMT3P

uSep20,2017uDec19,2017uMar7,2018uMay31,2018Aug21,2018Oct31,2018uJan24,2019aApr24,2019uJul25,2019

Source:Companyreports,UBS14

U.S.BeautyRetail26August2019Ⅷ15

WhatisthehistoricalmakeupoverlapwithULTA?

?Amazol1PalbWalmart1PofferilesofULTA'ston25makesnnrobsatsfatebeellimitebtfrosefosttfefistoryofosrssrtey.Tfisaateeoryrenreseltsoter50#ofULTA'sallsalsales.

-Olateraee,olly5#fatebeelaarriebbyAmazol1Palb4#fatebeelofferebbyWalmart1P.WetfilktfisfieflieftsULTA'snrobsatmixbiffereltiatiolfromtfemassafallelwfiafilsslatesitfromaomnetitiol.

-Atailabilitytfrosef3PsellersolAMZN&WMTisfief,bstnriaes