W&M-M-196

ULTA BEAUTY1

Introduction

Ulta announced record-breaking financial performance in the third quarter of FY2016. Revenues increased by 24.2 percent to $1.131 billion, while comparable sales and transactions grew by 16.7 and 11.1 percent, respectively. The retailer had consistently grown revenues by greater than 20 percent since FY2010. During this time, Ulta had also increased net income from 3.2 percent in FY2009 to 8.2 percent in FY2015, through careful management of SG&A expenses, which had dropped from 24.7 percent in FY2009 to 22 percent in FY2015. Further financial information is found in Exhibit 1. As a result, shares of Ulta grew 38 percent in 2016, exceeding the S&P 500 by approximately four times during the same period1. In 2015, Ulta became the largest beauty specialist retailer in the U.S. Ulta was uniquely positioned in the marketplace by offering both mass brands (e.g., CoverGirl, ) and prestige brands (e.g., Lancome, ).2 According to Fabian Garcia, CEO of , Ulta “has completely debunked the old notion that you were either prestige or mass. The fact that Ulta challenged the old paradigm is a good enough proof that the world is moving.”3 Brian Yarbrough, an analyst at Edward Jones & Company, agreed by stating that, “they are changing the way people shop as they have allowed people to buy both mass and prestige, as well as get salon, brow and other services which historically would have been done at multiple locations. No other retailer offers all three in the same spot.”4

The retailer attracted “beauty enthusiasts”, who were heavy purchasers of beauty products.5 The company estimated that there were 72 million “beauty enthusiasts”. They accounted for approximately 77 percent of the spending within the beauty market. Only 15 million of these customers, however, currently shopped at Ulta. 6 These customers were very different from “replenishment shoppers” who were habitual beauty product buyers and less willing to experiment. Beauty enthusiasts enjoyed experimenting with new products in physical stores, where product trial was encouraged. These shoppers were influenced by beauty bloggers, product reviews on retailer

1 This case was prepared by Yanhua (Rita) Liu, MBA 2017, under the supervision of Lawrence J. Ring, Chancellor Professor of Business and EMBA Alumni Chair in Executive Education and Professor Ron Hess, Associate Professor of Marketing, as a basis for class discussion. It is not intended to illustrate either effective or ineffective management. Copyright, 2017, by the Raymond A. Mason School of Business

1 websites, social media, and store employees. “For many beauty users – young and old – the convenience of online shopping can’t compete with the ability to try before they buy.”7 Beauty specialist retailing grew by 48 percent in the U.S. from 2012-2016. This performance represented the second fastest growing retail sector, behind only off-price department store retailing.8 As a result, competitors from a wide variety of sectors – even outside the traditional beauty channels - entered or significantly strengthened their beauty offerings. Pharmacy retailers, such as CVS and Walgreen’s, were especially interested in growing their shares of this lucrative market. According to eMarketer, 50 percent of females purchased from pharmacies.9 In response, CVS and Walgreen’s expanded and redesigned their beauty areas to grow this important business. CVS introduced beauty consultants and Walgreen’s added higher-end beauty brands. Both retailers also established beauty-specific loyalty programs to lure these customers. According to Brian Owens, Director of Kanter Retail, “they (CVS and Walgreen’s) want to convert shoppers who may have gotten ideas at or Ulta (Beauty).”10 Competition also appeared from outside the traditional beauty channel. Sizable beauty areas were added to Anthropologie and Barnes & Noble in 2016.11 In addition, strong growth in digital subscription offerings had also occurred. These services deliver a box of sample beauty products to customer homes for a small monthly fee. Purchases of the sample products could be made in store or online. More recently, subscription services were added by Sephora, Allure Magazine, Target, Walmart and others. Competition had also intensified from large branded retailers such as Mac, Chanel, and , as well as niche beauty retailers.12 Well-established beauty brands such as Este Lauder and L’Oréal were more aggressively opening branded stores in response to Sephora’s decision to restrict store space devoted to these brands to make room for LVMH parent brands.13 In addition, Bluemercury, an upscale niche beauty retailer, had also grown significantly in recent years and was acquired by Macy’s in 2015. The department store was very interested in growing this part of its business in the future. Over the past decade, Ulta established itself as a very successful retailer and the largest beauty specialist retailer in the U.S. As the retailer faced new competition from nearly every sector in retailing, future growth would be more difficult to achieve. According to Yarborough, an analyst at Edward Jones & Company, “there’s no way that sales are going to continue to run it. At some point, they are going to slow and run out of square footage growth.”14 The central question for the retailer was how it could

2 sustain its previous performance into the future. What strategic initiatives would Ulta need to focus on to continue its growth and financial performance? History

Founded by Richard E. George in 1990, an based company, Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ: ULTA) was the largest specialty beauty retailer in the U.S. and a one-stop destination for cosmetics, fragrance, skin care products, hair care products and salon services.15 In the early 90’s, beauty products were sold in distinct retail channels: department stores for prestige products, drug stores and mass merchandisers for mass products, and authorized retail outlets and salons for professional hair care products.16 Ulta beauty started as a discount beauty store and focused on delivering an unique customer shopping experience and then developed a successful business - “All things beauty, All in one place ™”. Ulta offered a full range of beauty categories, brands and price. Ulta offered prestige, mass products and full salon services in one retail store so their customers could find everything they need in one shopping trip. The business model allowed Ulta to serve female customer of all ages, demographics and lifestyles.17 In 1990, the first five stores opened in Naperville, Illinois, under the original name “ULTA 3 Cosmetics and Salon”. Ulta.com started on February 27, 1998.18 During 1990 to 1999, Ulta changed company names four times, from “Ulta3, Inc.,” to “Ulta 3 The Cosmetic Savings Store, Inc.,” to “Ulta 3 Cosmetics & Salon, Inc.,” and to “Ulta Salon, Cosmetics & Fragrance, Inc.” 19 The frequently changing names indicated that Ulta was continuing to improve the store image and provide sophisticated service. By 2000, Ulta operated 84 stores in 12 states. Exhibit 2 indicates that the new store layouts of level 6 and level 7 were introduced for improving the display of prestige cosmetics and skin care brands, including moving cash registers to the front of store, making room for the boutique, and adding sleeker and modern design elements. By 2010, Ulta operated 390 stores in 41 states. On October 24, 2007, the company traded publicly on the NASDAQ. 20 From 2011 to 2012, Ulta rapidly expanded to 48 states with 554 stores, and by January 30, 2016, Ulta operated 874 retail stores across the U.S.21 Environment Market

The beauty and salon service industry was large in U.S. According to Euromonitor International and IBIS World Inc., this industry delivered approximately 3

$127 billion in overall sales. Approximately $74 billion represented the beauty products market that included cosmetics, haircare, fragrance, bath and body, skincare, salon styling tools and other toiletries. The remaining $53 billion consisted of the salon services industry that included hair, skin and nail services. Exhibit 3 provides the U.S. beauty and salon service industry breakdown.

The beauty market was expected to maintain a slow and steady growth trend, with an anticipated annual compound growth rate of 2 percent from 2016 to 2020. 22 The key drivers included a recovering economy, population growth, especially among millennial women aged 18-34 and Hispanics, and quickly growing luxury beauty categories. In 2015, the luxury beauty product sales increased 7 percent over 2014 while the mass market rose just 2 percent.23

Within the beauty products market, color cosmetics were heavily driven by new fashion trends and experimentation to refresh a woman`s look, while haircare and skincare were mainly driven by high levels of regular use and penetration.24

The beauty market was less sensitive to the economic cycles than many other markets. During the recession, growth in the beauty market fell moderately compared to the drop in the global GDP growth rate.25 However, the beauty market was seriously impacted by seasonality. The holiday season from October to December generated more than 25 percent of the industry`s annual revenue.26 Fragrance and gift set revenue typically peaked during the winter holidays, Mother`s day, and Valentine`s Day.27 The beauty industry was significantly influenced by changing customer shopping behavior and preferences. Beauty shoppers, especially the millennial customers who were social media savvy and closely followed fashion trends, preferred to test and trial the beauty products before purchasing them. Competition

The beauty industry was highly fragmented and competitive. Beauty players included specialty retailers, department stores, mass merchandisers, drug stores, TV shopping networks, internet retailers, and supermarkets. Exhibit 4 shows that Ulta targeted two highly engaged consumer segments, the Beauty Enthusiasts and Beauty Enthusiasts on a Budget. Ulta`s major competitors were department stores, beauty boutiques and also mass retailers. To win, Ulta had to provide a wider range of products and higher service levels compared to that provided by mass retailers and department stores. Beauty shopper preference was shifting from traditional stores to specialists’ retailers. Exhibit 5 shows that the preference for beauty specialty stores increased 3.7 percent, contributed by both Sephora and Ulta. Department stores maintained their share, indicating that a strong existing shopper base still supported these retailers.

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Mass retailers were the most impacted by the shifting trend, with their drop of 3.1 percentage driven by Walmart`s 3.2 percent decrease. Drugstores dropped 1.4 percent. Amazon was steadily gaining share of shopper preference while their total percentage was still low. Exhibit 6 also shows that beauty specialty stores attracted shoppers from different channels. Similarly, regular shoppers of department stores and Amazon spent the most at specialists rather than at drug stores, the top destination for both groups of shoppers in 2015. Beauty retailers had different strategies to tackle the complicated situation and gain further growth in beauty industry. Department Stores Department stores, such as Macy`s and Nordstrom, were focused on prestige beauty brands. In order to attract younger shoppers and create user-friendly shopping experiences, department store retailers changed their traditional beauty selling model from closed counter to open-sell, stocking and displaying products outside the counters and allowing shoppers to try them before purchasing.28 Previously, the brands were separated by different service counters, staffed by a sales person who only sold that brand, and all products were stocked in closed cases. Macy`s impulse beauty concept and Nordstrom`s beauty concierge broke the physical barrier between the products and shoppers and an on-demand customer service assistance was provided if the customer requested the service.29 Expanding beauty service capability was another strategy for department stores to maintain existing customers and acquire new customers. In March 2015, Macy’s acquired Bluemercury for $212 million. Bluemercury was the nation`s largest and fastest-growing luxury beauty products and spa retail chain with 80 specialty stores and an online business at bluemercury.com. This acquisition significantly enlarged Macy`s beauty service scope from world-renowned oxygen , glycolic peels, to microdermabrasion. Macy`s supported the expansion of freestanding Bluemercury stores and also operated Bluemercury shops within Macy’s. 30 In September 2016, Macy`s teamed up with BeGlammed to deliver at-home primping service in 22 cities, including Los Angeles, New York, Miami, Las Vegas, San Francisco, Chicago, among others. BeGlammed was a national leading on-demand beauty service provider, which had more than 1,200 hairstylists and makeup artists. In time, this partnership would help Macy`s connect customers outside the brick-and-mortar stores, drive customer engagement and attract new customers. 31 Drugstores Drugstores such as Walgreen and CVS were the place where beauty shoppers bought mass-market brands such as Revlon, Maybelline, Cover Girl, and NYX. The

5 drugstores won the customer mainly based on their convenient locations and regular discounts. For future growth, drugstore retailers were focused on new offerings and improving customer service. For example, Walgreens leveraged prestigious brands, such as Boots No.7, the UK`s number 1 brand to boost their beauty categories. Likewise, CVS expanded their offerings with new brands such as Nip+Fab, Skinfix and Organic Doctor, and added beauty advisors to around 1,000 stores.32 Big-Box Retailers Shoppers usually could find popular mass beauty brands with great value from Big-Box retailers such as Target and Walmart. The mass merchandisers tended to offer the lowest price compared to other retailer formats. Exhibit 8B shows that the average sampling unit price was approximately 28 percent less at Walmart and Target than at CVS and Walgreen. The prestige beauty category was considered to be a growth driver for mass merchandisers. In 2014, Walmart rolled out the Flower cosmetics line at a mass price. 33 Target and Walmart also experimented with subscription beauty boxes to drive beauty sales both in store and online. Walmart Beauty Box subscribers received a custom box each season filled with product samples that were all available at Walmart for purchase, as well as coupons for beauty products. With a $5 subscription fee, Walmart Beauty Box was a limited edition offering and sold quickly. Online Subscription Box Service Besides Amazon.com, online subscription box services, such as Birchbox, Ipsy’s Glam Bag, Memebox, and Scentbird were new players in the beauty industry. For a $10 monthly subscription fee, Birchbox provided its customers with a carefully chosen set of beauty products every month with free shipping cost. Subscription services allowed customers to try on products in the comfort of their own homes. These services were favored by both female and male customers. From the YouTube videos, observers could find the subscription service that made recipients very excited by creating the unboxing experience.34 Specialty Retailers Ulta and Sephora were the leading beauty specialty retailers in U.S. Exhibit 7 shows that by 2015, Ulta was the largest beauty retailer by total revenue of $3.72 billion and Sephora was ranked first in terms of sales per store of $5.1 million. Sephora was founded in by Dominique Mandonnaud in 1979 and acquired by Louis Vuitton and Moet Hennessy (LVMH) in 1997. Its first U.S. store was opened in New York in 1998 and Sephora.com was launched in 1999. By 2016, Sephora had over 1,780 locations in 29 countries, including 370 in North American and

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546 in-store shops inside J.C. Penny stores. 35 Considered as a beauty pioneer, Sephora carried almost every trendy prestige brand except for Chanel and MAC and had limited private label products compared to other specialty retailers. Sephora also created a consistent customer experience through Sephora.com, and all social media platforms, including Facebook, Twitter, Instagram, Pinterest, and Snapchat. Sephora.com was easy to navigate. The website included The Beauty Talk, a digital community that provided customers with a channel to discuss various beauty topics such as makeup, skincare, fragrances and more.36 Sephora Virtual Artist was a virtual experience that allowed customers to digitally try on dozens of color variations within seconds. The Sephora Beauty Board allowed customers to post pictures that showed the cosmetics. In addition, Sephora TV provided “how-to” videos that were popular on YouTube. 37 Sephora`s Beauty Insider Program (VIB) was one of the top loyalty programs in the industry. This program had over ten million Beauty Insider Members. VIB offered three different tiers, Beauty Insider, VIB, and VIB . The rewards varied within these three tiers. Rewards such as exclusive products and events, access to the beauty studio, and early access to products introductions created a sense of luxury and assigned an exclusive status to members in the upper tiers. Sephora also created personalized product recommendations for Beauty Insider members based on their shopping histories. For those new to using cosmetics, Sephora generated recommendations specific to the Beauty Profile based on the information provided by shoppers. 38 Emerging Beauty Brands Possessing their own brick and mortar stores was a strategy for beauty brands to sharpen their brand image and enhance their distribution channel capability. NYX Cosmetic was one of the professional make-up brands in the beauty mass-market. Founded in Los Angeles in 1999 and started with one successful product, Jumbo Eye Pencil, NYX developed more than 2,000 items within two decades. NYX products were available on nyxcosmetics.com and partially carried by retailers such as Ulta, CVS and Target. As one of the influential brands in digital beauty, NYX had 5.8 million followers on Instagram and 1.5 million fans on Facebook.39 By 2016, NYX operated 23 stores including its first flagship store in Manhattan. According to Nathalie Kristo, General Manager of NYX, the digitally enhanced store extended the online beauty community experience and continuously engaged customers from off line.40 Pentagon Place

Store Size:

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By 2016, Ulta beauty had 928 stores in 48 states in the U.S., with an annual compound growth rate of 12 percent from 2011. After announcing its store expansion plan of 1200 stores by 2019, Ulta updated that number in October 2016 to 1,400 to 1,700.41 Over the years, Ulta increased its store size from the original 7,500 square-feet to accommodate its business strategies. By 2016, the average store size was generally 10,000 square feet, including approximately 950 square feet devoted to a full-service salon. The salon area included a concierge desk, skin treatment room or dedicated skin treatment area, and semi-private and hair color processing area. Store Location: Ulta stores were generally located in strip malls where stores were arranged in a row, with a sidewalk and a large parking lot in front. Strip malls faced major traffic arterials and tended to be self-contained with pedestrian connections to surrounding neighborhoods. To capture suburban, middle class customers, Ulta preferred neighboring retailers like Target, Best Buy and T.J.Maxx to convenience store and dollar stores. Some Ulta stores were located next to Trader Joe’s or Whole Foods Market.42 The company also examined consumer consumption data to identify favorable locations for new stores.43 Layout and Design: Ulta`s store concept included layout, displays, lighting and quality of finishes that consistently supported its business strategy of integrating service, mass, and prestige all in one place and targeting a mainly suburban market.44

Because Ulta was located in the strip malls with car traffic instead of foot traffic, the store window design was tailored to a suburban market by displaying huge posters to attract shoppers` attention. Within Ulta, the bright and feminine color of light pink and yellow created a peaceful feeling and fresh shopping experience. The store was divided into three areas for salon services, mass and prestige brands. The 6-foot aisles allowed shoppers to browse leisurely between mass and prestige products with little effort or intimidation. According to Erwin Winkler, Senior Director of Store Planning and Design at ULTA Beauty, the store was based on a church like design layout. “For example, the altered piece at the back is the salon with an illuminated arch to describe it and illuminated arches around the perimeter that are the chapels of a church. Instead of one aisle, we created two aisles, so you are forced to loop around as you do at Church. You need to have an experience to present. Not just product”.45

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The beauty products were arranged in self-service displays and full-service boutiques in a bright open store environment that encouraged the guests to enjoy discovering new products and services. Four to five boutiques that included prestige cosmetics and skin care brands appeared along the side walls of the store.46 Data revealed that 75 percent of customers spent at least 15 minutes per visit in an Ulta store.47 Product

Intensity: The graph presented below showed that merchandise intensity continuously grew from 2011 to 2015. This increase in inventory was driven by the company’s rapid expansion strategies and consisted of pre-inventory for new stores opening, incremental inventory for prestige brand boutiques, and inventory for new distribution centers.48 A more detailed table of merchandise intensity for Ulta is included in Exhibit 9.

Assortment: Ulta`s merchandising strategy was to offer the most extensive product and brand selection. A typical Ulta Beauty store carried more than 20,000 prestige, mass and professional beauty products from over 500 well-established and emerging beauty brands across all categories and price points, as well as private label products called the Ulta Beauty Collection.49 Brands included Bare Minerals, Clinique, and Urban Decay prestige cosmetics, NYX and Maybelline mass cosmetics, Coty and Estée Lauder Companies fragrances, Redken and Matrix haircare, as well as Dermalogica and Philosophy skincare and Clarisonic, CHI, and Helen of Troy personal care appliances. Ulta also continuously added new brands every year.50 By 2015, the Ulta Beauty Collection and Ulta Beauty Exclusive products represented approximately 6 percent of total company sales. Both were strategically important categories for growth and profit contribution. The exclusive brands were

9 created through partnership or acquisition. The exclusive scope covered whole product categories, specific products, stores, and early launch.51

Ulta carried products in the following categories:52  Cosmetics, which included products for the face, eyes, cheeks, lips, nails and brushes,  Haircare, which included , conditioners, styling products, hair accessories and hair brushes,  Salon styling tools, which included hair dryers, curling irons and flat irons;  Skincare and bath and body, which includes products for the face, hands and body,  Fragrance,  and nail care products,  Men’s skincare, haircare and fragrance products,  Ulta Beauty Collection, consisting of cosmetics, skincare, bath and body products and haircare,  Other health and beauty products.

Style and Fashion Though the stores were seldom located in upscale urban shopping centers, Ulta understood how American women bought beauty products. Ulta offered trend-right products by establishing partnerships with leading cosmetic and salon brands. A dedicated merchandising team continuously monitored current fashion trends, historical sales trends, and new product launches to keep Ulta Beauty`s product assortment fresh and relevant to customers.

Service One key differentiator for Ulta was salon services. The strategy for salon services was to drive awareness and trial of salon services with new guests and accelerate the frequency of existing customer visits. Ulta established partnerships with leading salon companies to provide high quality and consistent service from their licensed stylists. For example, with haircare services, Ulta had a strong partnership with Rodney Cutler of Redken. For skin services, the retailer collaborated with Dermalogica across all its locations. The retailer also established a relationship with Benefit Brow Bars for brow services in most stores.53 By 2015, salon revenue accounted for 5.4 percent of total company revenue. Hair blowouts, hair treatments, and makeup services, achieved comparable sales growth of 10.1 percent. According to company records, the salon customer spent 2.5

10 times more than non-salon customers and shopped twice as frequently as non-salon customers.54 Price

As shown in Exhibit 8A, Ulta`s pricing of premium brands was similar to other competitive retailers. It was likely that beauty retailers preferred to follow the manufacturers` suggested retail prices for premium products. Offering special free gifts was a way to differentiate itself and attract shoppers to buy premium brands from Ulta. For example, free gifts were provided when customer purchased Clinique, Calvin Klein, Bvlgari, and ESTÉE LAUDER. Exhibit 8B shows price data for the mass-market brands. The data indicated that Ulta`s average unit price was approximately 9 percent lower than prices at drugstore retailers but approximately 26 percent higher than prices at big-box retailers. Believing its shoppers were price sensitive, Ulta continuously leveraged discounts, promotions, and coupons to attract shoppers to buy from them. For example, “buy 1 get 1 50% off” was offered on products from Covergirl and Maybelline to drive sales and offset the price differences at Target. People

Service Beauty consultants and salon professionals were an important ingredient for Ulta able to provide distinct customer service. The beauty consultants were well-trained and provided customers with unbiased and customized recommendations. Approximately 6800 employees were licensed professional stylists and estheticians that offered high quality in-store salon service and informative experience, including consultations, styling lessons, skincare regimens, and at home care recommendations.55 To keep up with fashion trends, Ulta formed a dedicated artistic team to develop haircut, color, and finishing techniques that were reflective of current trends. They created and delivered high impact training programs integrating hair and make-up looks straight from the runway to all of their salon professionals.56 Employee Climate Exhibit 10 shows that a typical Ulta store included a general manager, salon manager, two associated managers, and approximately twenty full and part-time associates; including four to eight prestige consultants and eight to ten licensed salon professionals. The general manager was in charge of all store activities and made store-level operating decisions, including salon management, inventory management, merchandising, cash management, and scheduling, hiring, and customer services.

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Each general manager reported to a district manager, who in turn reported to a Regional Vice President of Operations. Each store team received additional support from recruiting specialists for the retail and salon operations regionally based human resource managers, a field loss prevention team, salon technical trainers, management trainers, and vendor partners.

Ulta`s associate engagement score of 80 percent was ranked in top 25 percent globally and was higher than the retail industry benchmark score of 72 percent.57 Ulta was committed to continually developing their associates and providing career advancement opportunities. They used a combination of existing managers, promoted associates, and outside hires to support new stores. In 2008, Ulta launched a career path program named Path to Abundance to help its stylists and estheticians achieve personal and professional success. It was a five level promotion program. One benefit of professional promotion was an increase in commission percentage. This program increased the stylists’ loyalty to the company, and reduced turnover from 80 percent to 35 percent. The turnover rate on team members at the master designer level was down to 10 percent. 58 Communication

Ulta`s communications were run through the customer loyalty program, CRM, YouTube, social media, national ads, intense weekly flyer and annual events. Ultamate Reward Program According to Nielson, “A retail loyalty program can be an effective way to create competitive advantage by reducing customers’ likelihood to switch stores…. All other factors equal, they will buy from a retailer with a loyalty program over one without” 59 The Ultamate Reward Program was one of Ulta`s biggest assets. It was a points- base program and enabled customers to earn points based on their purchases. Points earned were valid for at least one year and could be redeemed on any product that Ulta sold. Customers could join the program from either an Ulta store or Ulta.com without any membership fee.60

Ulta offered several different tiers within its loyalty program to influence shopping behavior and attract customers to spend more. Members who spent $450 in a calendar year would become Platinum Members, which provided customers extra benefits such as 25 percent higher points earned per dollar spent, an additional birthday coupon, and no point expiration as long as the platinum level was maintained.61 The number of members steadily grew from 2011 to 2015, increasing 21 percent to 18.2 million compared to 15 million in 2014. The store transaction data demonstrated that 80 percent of annual total revenue was contributed by loyalty members, who

12 shopped with higher frequency and spent more per visit as compared to non- members.62 CRM (Customer Relationship Management) In 2012, Ulta partnered with Adobe to conduct a marketing campaign to reach Ultamate rewards members with personalized marketing. The goal of the partnership was to make the communication relevant to specific customers with the right channel and right message. “The campaign was heavily with email, direct mail, and partially with mobile or other online type message” according to Eric Messerschmidt, the SVP of Ulta Beauty Loyalty and CRM. “The email campaign significantly drove revenue, increasing the sales per delivery by 141 percent, decreasing total email deliveries 17 percent and increasing open rate 47 percent in 2013.”

The CRM solution included customer data mining, relevant content design, and improved reach of loyalty members. There were three major steps in dealing with customer data at Ulta. First, the company built a golden record for each customer by aggregating all the relevant information from 39 data feeds in seven systems. These systems included marketing planner, loyalty program, POS, email, salon, pricing, and e- commerce. Second, Ulta segmented the customer base by designed rules, model customer behaviors, and integrated this with delivery channels. Finally, the company revised the model scoring with daily updated information.63 Ulta designed an email format with several sections that could be personalized by relevant contents. For example, one section was the message of the bonus points. The loyalty members who shared the same bonus points would get the same message in this section. However, if their buying histories were different, they would have different product recommendations in the section of product offering. Exhibit 11 reveals that 220 unique personalized email messages could be generated by using a combination of 11 different messages to maintain the platinum, five different bonus point messages and four different product offers. Contents were distributed through two major channels, direct mail or email, according to the preferences of loyalty members. If Ultamate members purchased in- store or online within 2 to 3 months, they could receive direct mail and catalogs each month with the latest new products, trending information, coupons, and post cards. 64 More than 10 million catalogs circulated each year, according to Eric Messerschmidt. Ultamate members could receive an email message every morning and members could easily unsubscribe online. Special events, such as discount for birthday and 21 days beauty, were also important promotion contents.65 YouTube (https://www.youtube.com/Ulta)

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By 2016, Ulta had more than 30,000 YouTube subscribers. YouTube was a platform to create a perfect connection between products and viewers and drive sales to Ulta.com. The connection was built through videos made with beauty tutors and beauty video bloggers (vloggers) who were the key elements of the Ulta YouTube channel. The company provided professional procedures and tips about how to use the product perfectly in the Beauty Tutorials section. In addition, Ulta Beauty Hauls were video collections that were created and shared by beauty vloggers through their own social network via #ultahauls. Haul videos were mainly about beauty vloggers’ recent purchases from Ulta. By leveraging the beauty vloggers` network, Ulta exposed customers to new products to enhance engagement and develop more beauty fans.

Ulta worked with Vinjavideo, a California based Internet company, to embed the segmented haul videos on Ulta.com.66 Exhibit 12 shows that by searching #ultahauls on Ulta.com, viewers could watch the specific part of haul video by selecting the products mentioned in the video. Clicking the button “shop now”, viewers could browse the specific product page while they could still enjoy the video. Social Media

Social media had become a fundamental place to win customers and to influence them on deciding where to shop. “It is part of the marketing mix,” said Mary Dillon, CEO of Ulta, emphasizing the importance of seeing social media as a part of a bigger picture. 67 In the consumer driven era, successful retailers had to utilize different marketing strategies for different media channels to reach their target customers and then convert them to be profitable customers. Exhibit 13 indicates that Facebook was the most used social media channel with approximately 70 percent of Facebook users on the site on a daily basis, followed by Instagram, Twitter, and Pinterest. Facebook (https://www.facebook.com/UltaBeauty/) Facebook was Ulta`s main social media platform to focus on promoting both products and the company brand. Specifically, Ulta used Facebook to promote products and in-store services, present company culture and value, and build the Ulta community. By 2016, Ulta Facebook had 2.2 million fans. Ulta regularly posted new product information, advertisements, fun videos, tips, events, and company news. Exhibit 14 shows that customers considered Facebook as a channel that allowed them to talk with Ulta directly. They asked questions about products, delivery, free samples, and to provide feedback and complaints. Ulta managed customer

14 feedback by providing real-time and helpful customized supports. Customers could also send private messages through “Messenger” and Ulta would reply within one hour. Instagram (https://www.instagram.com/ultabeauty) Instagram was a platform that Ulta mainly utilized for deepening customer engagement and driving traffic to their website. By 2016, Ulta had 2.8 million followers on Instagram. Ulta`s Instagram targeted the online young female adults aged from 18 to 34 years old, who were active on Instagram. This segment represented approximately 10 percent of the total online users according to Instagram user profiles (see Exhibit 15). Ulta optimized its Instagram profile page with the brand slogan -“All things beauty, all in one place” to tell customers who they were. The company featured fun activity to engage customers with their brand and the company website allowed customers to buy online.68 Ulta posted on Instagram about three times each day. The content focused strictly on product showcases. When the fans visited the Ulta Instagram, customers would see high quality product images or fun promotion videos consistent with a feminine color theme, staying true to its brand image. Ulta used Instagram captions in a funny and familiar persuading voice to which customers could relate. Hashtags were also used to enhance customer engagement. The most frequently used hashtags were #Ulta, #Joytothegirl, #ultabeauty, and #tfsweetpeach.69 Twitter (https://twitter.com/ultabeauty) Ulta`s Twitter account started in 2009. The amount of followers increased to 516, 000 by the end of 2016. Ulta utilized Twitter as an extended support from Facebook to increase brand awareness and service the customers who needed quick information. Ulta interacted with customers with the latest media content and serviced customer concerns by sending and reading text-based messages of up to 140 characters (“tweets”). The customer could also receive news feeds (referred to as “#Ulta”) posted by other followers. Exhibit 16 shows that based on the platform structure, Ulta broadcasted promotions, trends, special events and other timely information through “Tweets” and “Media” and replied to customer questions via “Tweets & replies”. Pinterest (https://www.pinterest.com/ultabeauty/) Pinterest was a customer learning and information acquisition platform that was organized in collages (boards) and pins according to different topics. By 2016, Ulta had approximately 134,000 Pinterest followers. Ulta leveraged this platform to promote products and acquire customers by providing fun education about how to apply makeup.

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Exhibit 17 shows that customized boards with creative and interesting board names covered all Ulta product categories. Boards were also created with seasonal and holiday themes. When the users checked the pins, it was easy to find a funny description under the pin. “A related Pins” provided different pin sources to help users compare similar products from other popular pins or gain better knowledge about the use of a product. The pin was clickable which provided users with a direct link to the Ulta website to purchase the product. Ulta Pinterest encouraged users to add comments under the pins. However, no hashtags, promotional information or sales-like marketing was included. National Ads Campaign In 2014, Ulta launched a national advertising campaign that integrated TV, radio and digital marketing. Ads were played in the peak-time shows such as The Voice and Dancing with the Stars.70 The first national ad campaign was dominated by fun and color, including an image of a one-stop shop for all things beauty. According to the company, aided brand awareness rose to 84 percent in 2016 vs.61 percent in 2011, unaided brand awareness improved to 40 percent vs. 22 percent.71 Weekly Flyers

Ulta loyalty member would receive the flyer weekly. The flyer was prominent on specials and discounts on popular brands and products. Weekly flyer created a continuous physical touch point between Ulta and customer and added incentive for the consumer to get in touch sooner. 21 Days Of Beauty It was the most important annual promotion event on Ulta`s calendar. Exhibit 18 shows that 21 days of Beauty allowed customers to shop popular brands with up to 50 percent over a three-week period. This event was favored by beauty shoppers and drove traffic significantly. Meanwhile, it might also lead customer to consider Ulta as a “beauty discount store”. Triangle

Systems: Ulta`s operation was supported by various information systems. The central computer system provided information for all business functions, including supply chain, merchandising, POS, e-commerce, marketing, finance, accounting and human resources. Ulta had a technology system that could calculate sales data at store level, allowing real time information sharing among stores, corporate users, and distribution centers. The supporting technology was updated on a regular basis.

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Ulta utilized SWIFT, store warehouse inventory fulfillment tool, to produce more accurate forecasts for both stores and e-commerce. This tool turned the manual process to an automated one. 72 Ulta also launched PIM, product information management system, which improved data governance and aligned production information across all channels.

Logistics and Distribution: By 2016, Ulta operated five distribution centers that were based on two DC models by different size. The first three DCs had average size of 300,000 to 350,000 square feet and were located in Illinois, Pennsylvania, and . To support the expansion of omnichannel capabilities, Ulta opened another two DCs in Greenwood, and Dallas, . The Midwest DCs were approximately 671,000 square feet each.73 Exhibit 19 shows that the Midwest DC improved Ulta`s operation efficiency and service level by increasing the store delivery frequency, e-commerce order turnaround, and the number of daily order processing.

All inventory was shipped to Ulta`s distribution centers from suppliers, and then delivered to each store via contractors or local carriers. The distribution centers used warehouse management software systems to support product purchase decisions. The store used pick-to-light software for fulfillment and product replenishment was primarily based in units that allowed the products shipped to be less than an entire case when only one or two of a particular product was required.74 Ulta established partnerships with well-known distributors to streamline the supply chain and improve the operation efficiency. A joint project with Fortna®, the distribution expert, included new IT system capabilities, store-ready shipment for faster shelf stocking in-store, and leveraged a common pool of inventory across channels. Through these activities, Ulta improved store delivery times by more than 50 percent. 75 Suppliers: Ulta had over 350 vendor partners across the beauty categories of prestige, mass, and salon services. There were vendors across all product categories, such as Bare Minerals, Coty, Estée Lauder, L’Oréal and Procter & Gamble, among others. 76 Ulta established good long-term relationships with key partners, and the scope of these relationships created an impediment for other retailers to replicate Ulta`s business model.77 Ulta`s strategic partnership with certain core brands included joint planning sessions, such as “21 Days of Beauty” events, cooperation for marketing campaigns, and sharing of loyalty and customer insights data to drive trial and penetration across categories and brands. The merchandise from their top ten supplier partners accounted for approximately 50 percent of net sales.

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Ulta continuously sourced new vendors based on a win-win approach. As the first retailer to see the potential of NYX, Ulta launched NXY in 2007. By 2015, NYX supplied more than 1200 skus and many were exclusive to Ulta.78 The Future

As 2017 dawned, Ulta was on a roll. Sales and profits were at a record high, and the stock price reflected this performance. Both Fortune79 and Forbes 80 published highly complementary articles about the company and its dynamic CEO, Mary Dillon. Fortune noted that Ulta’s market cap had now passed other notable big retail brands like Macy’s, Nordstrom, Whole Foods Market, The Gap, Tiffany, and ’s. However, the highflying company also faced high expectations for continued rapid growth and expansion. At the same time, competition was intensifying—from Sephora to Macy’s, and from Amazon to Target, plus the drug giants, Walgreen and CVS—Ulta was increasingly in the bullseye of a diversified array of large and aggressive competitors. The challenge for Mary Dillon was to keep Ulta focused while continuing its rapid and profitable growth in both number of stores and like for like sales per store. To make this happen, the company needed to stay ahead of its competitors; continue to innovate; avoid the cannibalization that large numbers of stores invites; and continue to find new customers.

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Exhibit 1: Selected Financial Data

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Source: Ulta Financial Report 2015

Exhibit 2: Ulta Store Formats

Source: Ulta.com

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Exhibit 3: U.S. Beauty and Salon Service Industry Breakdown

Source: Ulta Evercore ISI Conference, March 16, 2016

Exhibit 4: Beauty Customer Segmentation

Ulta Evercore ISI Conference,March 16, 2016

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Exhibit 5: Shopping Channel Preference of Beauty Products in U.S.

Exhibit 6: Where the channels` shoppers spent the most on cosmetics

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Exhibit 7: 2015 U.S. Beauty Retailer Ranking by Total Sales & Sales per Store

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Exhibit 8A: Sampling Unit Price Comparison Cross Retailers - Prestige Brands

Retail Price (ea) Luxury Brand Product Description Ulta.com Sephora.com Nordstrom.com Macys.com BareMinerals Original Foundation Broad $28.50 $28.50 $28.50 $28.50 Spectrum SPF 15 BareMinerals Correcting Broad $21.00 $21.00 $21.00 $21.00 Spectrum SPF 20 BareMinerals READY Eyeshadow 8.0 The Sexy $41.00 $41.00 $41.00 $41.00 Neutrals BareMinerals Lasting Line Long-Wearing $17.00 $17.00 $17.00 $17.00 Eyeliner BareMinerals Prime Time BB -Cream $27.00 $27.00 $27.00 $27.00 Daily Defense Broad Spectrum SPF 30 CLINIQUE Liquid Facial Soap - Mild $17.00 $17.00 $17.00 $17.00 6.7 oz Special free gift with purhcase CLINIQUE Moisture Surge Extended Thirst $39.00 $39.00 $39.00 $39.00 Relief Special free gift with 1.7 oz purhcase CLINIQUE Stay-Matte Sheer Pressed $25.00 $25.00 $25.00 $25.00 Powder Oil-Free Special free gift with purhcase CLINIQUE Acne Solutions Clinical Clearing $17.50 $17.50 $17.50 $17.50 Gel Special free gift with 0.5 oz purhcase CALVIN KLEIN Deep Euphoria Eau de Parfum $72.00 $72.00 $72.00 $72.00 1.7 oz Special free gift with purhcase CALVIN KLEIN Eternity Women Eau de Parfum $68.00 $68.00 $68.00 $68.00 Spray Special free gift with 1.7 oz purhcase CALVIN KLEIN Euphoria Men Eau de Toilette $62.00 $62.00 $62.00 $62.00 1.7 oz Special free gift with purhcase LANCÔME Visionnaire LR 2412 4% Cx $79.00 $79.00 $79.00 $79.00 Advanced Skin Corrector - 1.0 oz LANCÔME La vie est Belle Eau de Parfum $86.00 $88.00 $88.00 $88.00 1.7 oz Special free gift with purhcase LANCÔME Advanced Génifique Youth $78.00 $78.00 $78.00 $78.00 Activating Serum - 1.0 oz LANCÔME Cils Booster XL Vitamin Infused- $25.50 $25.50 $25.50 $25.50 Mascara Primer LANCÔME Rénergie Lift Multi-Action Lifting $97.00 $97.00 $97.00 $97.00 And Firming Cream - All Skin BVLGARI Omnia Crystalline Eau de $66.00 $66.00 $66.00 $66.00 Toilette Spray Special free gift with 1.35 oz purhcase BVLGARI au thé Blanc Eau de Parfum $72.00 $72.00 $72.00 $72.00 1.33 oz Special free gift with purhcase TARTE Tartelette Clay Matte $45.00 $45.00 $45.00 $45.00 Eyeshadow Palette TARTE Lights, Camera, Lashes 4-in-1 $21.00 $21.00 $21.00 $21.00 Mascara Black TARTE BB Tinted Treatment 12 Hour $36.00 $36.00 $36.00 $36.00 Primer Broad Spectrum SPF 30 1.0 oz They're Real! Lengthening $24.00 $24.00 $24.00 $24.00 Mascara - 0.3 oz Benefit Cosmetics The POREfessional Face Primer - $31.00 $31.00 $31.00 $31.00 0.75 oz Benefit Cosmetics Hoola Matte Bronzer - 0.28 oz $29.00 $29.00 $29.00 $29.00 Benefit Cosmetics Hello Flawless Powder $34.00 $34.00 $34.00 $34.00 Foundation - 0.25 oz Urban Decay Naked3 Palette $54.00 $54.00 $54.00 $54.00 Urban Decay Eyeshadow Primer Potion - $20.00 $20.00 $20.00 $20.00 Original - 0.33 oz Urban Decay 24/7 Glide-On Eye Pencil $20.00 $20.00 $20.00 $20.00 It Cosmetic Bye Bye Redness Correcting $32.00 $32.00 $32.00 $32.00 Crème - 0.37 oz It Cosmetic Bye Bye Under Eye Anti-Aging $24.00 $24.00 $24.00 $24.00 Concealer - 0.28 oz ESTÉE LAUDER Advanced Night Repair $92.00 $92.00 $92.00 $92.00 Synchronized Recovery Complex Special free gift with II - 1.7 oz purhcase ESTÉE LAUDER Double Wear Nude Cushion $39.50 $39.50 $39.50 $39.50 Stick Radiant Makeup- 0.47 oz Special free gift with purhcase ESTÉE LAUDER Pure Color Envy Hi-Lustre Light- $32.00 $32.00 $32.00 $32.00 Sculpting Lipstick - 0.1 oz Special free gift with purhcase Data Source: Ulta.com; Sephora.com; Nordstrom.com; macys.com

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Exhibit 8B: Sampling Unit Price Comparison Cross Retailers – Mass Brands

Retail Price (per ea) Brand Product Description Ulta.com Target.com Walmart.com CVS.com Walgreen.com Amazon.com NYX 3C Conceal Correct Contour Palette $11.99 $11.99 $14.10 $11.99 $12.49 NYX NYX Matte Liquid Liner - Black - 0.06 oz $6.99 $6.99 $10.25 NYX Matte Finish Makeup Setting Spray $7.99 $7.99 $7.99 NYX Matte Lipstick $5.99 $5.99 $7.96 $5.99 $8.61 Olay Total Effects Refreshing Citrus $9.99 $10.49 Olay $6.99 $6.96 $7.99 Scrub - 6.5 oz Buy 1, get 1 at 40% off Buy 1, get 1 50% Off Regenerist Regenerating Cream $7.99 $7.99 Olay $5.39 $5.37 - 5.0 FL oz Buy 1, get 1 at 40% off Buy 1, get 1 50% Off Regenerist Micro Sculpting Cream - 1.7 $28.99 $28.99 Olay $17.99 $20.47 $30.99 $16.99 oz Buy 1, get 1 at 40% off Buy 2, get 3rd free L'Oréal® Paris Infallible Matte $12.99 $12.99 $12.99 $12.99 L'Oréal® $9.89 $9.87 Foundation Buy 2, get 1 free Buy 1, get 1 at 50% $11.49 L'Oréal® Exfoliate & Refine Clay Mask - 1.7 oz $12.99 $9.99 $9.09 $12.99 $8.64 Buy 2, get 3rd free $9.99 L'Oréal® Sublime Glow Daily - 8.0 oz $10.99 $9.49 $8.52 $8.09 Buy 2, get 3rd free $24.99 L'Oréal® Age Perfect Eye Renewal Eye Cream $24.99 $19.99 $13.92 $25.49 $13.22 Buy 2, get 3rd free $9.99 L'Oréal® Feria Multi-Faceted Shimmering Colour $9.99 $13.02 $10.49 $9.49 Buy 2, get 1 free Outlast Stay Fabulous 3-In-1 Foundation $11.99 $11.99 Covergirl $11.99 $8.59 $8.52 $8.52 1.0 oz Buy 1, get 1 at 50% $1.00 off coupon $7.99 $8.79 Covergirl Clump Crusher Mascara 0.44 oz $5.99 $5.41 $5.99 Buy 1, get 1 at 50% off $1.00 off coupon $6.99 $6.79 $6.79 Covergirl Perfect Point Plus Eyeliner $5.99 $4.45 $4.49 Buy 1, get 1 at 50% Buy 1, get 1 at 50% $1.00 off coupon $11.99 $12.99 $11.99 Covergirl Goldens TruNaked Eyeshadow Palette $9.99 $9.98 $13.18 Buy 1, get 1 at 50% off Buy 1, get 1 at 50% Buy 1, get 1 at 50% off Instant Age Rewind Eraser Dark Circle $8.99 $7.99 $6.74 Maybelline $6.79 $7.15 $9.99 Treatment Concealer Buy 1, get 1 at 50% off Buy 1, get 1 at 50% off $7.99 Maybelline Color Sensational Vivid Matte Liquid Lip $6.99 $6.25 $8.29 $7.99 $5.51 Buy 1, get 1 at 50% off Fit Me Matte + Poreless Foundation 1.0 $7.99 $7.49 Maybelline $5.99 $5.35 $7.39 oz Buy 1, get 1 at 50% off Buy 1, Get 1 50% OFF $7.49 Maybelline Color Sensational The Loaded Bolds Lip $5.59 $4.97 $8.29 $7.29 $4.72 Buy 1, get 1 at 50% off $6.99 $6.79 Fresh Foaming Cleanser 6.7 oz $4.36 $4.47 $7.99 Buy 1, get 1 at 40% off Buy 2 get 3rd free $5.88 $7.99 $8.49 Neutrogena Oil Free Eye Makeup Remover 5.5 oz $5.59 $5.82 $8.99 $5.59 Buy 1, get 1 at 40% off Buy 2 get 3rd free Rapid Wrinkle Repair Night Moisturizer $23.99 Neutrogena $21.99 $17.09 $17.50 $23.99 $15.95 1 oz Buy 2 get 3rd free

Data Source: Ulta.com; target.com; walmart.com; cvs.com; walgreen.com; amazon.com

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Exhibit 9: Merchandise Intensity

Merchandise Intensity FYE 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Net Sales (in'000 millions) $ 755.1 $912.1 $1,084.6 $1,222.8 $1,454.8 $1,776.2 $2,220.3 $2,670.6 $3,241.4 $3,924.1 Net Sales per Sq.ft $ 398 $ 399 $ 366 $ 353 $ 382 $ 402 $ 418 $ 407 $ 421 $ 450 Inventory (in $ millions) $ 129.2 $176.1 $ 213.6 $ 206.9 $ 218.5 $ 244.6 $ 361.1 $ 457.9 $ 581.2 $ 761.8 Footage(in '000s) 1,897 2,286 2,963 3,464 3,808 4,418 5,312 6,562 7,699 8,720 Merchandise Intensity (Investory per Sq.ft) $ 68.10 $77.04 $ 72.08 $ 59.73 $ 57.37 $ 55.36 $ 67.98 $ 69.78 $ 75.49 $ 87.36 Data Source: Ulta Annual Report Exhibit 10: Store Management Organization Chart

Source: Ulta Annual Report 2015

Exhibit 11: Personalized Email Example

Source:tv.adobe.com/watch/adobe-summit-2014/building-loyalty-and-driving-revenue- at-ulta-beauty/

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Exhibit 12: Emended YouTube Video

Source: Ulta.com

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Exhibit 13: Social Media Platform Popularity

Source: Pew Research Center

Exhibit 14: Ulta Facebook

Source: https://www.facebook.com/UltaBeauty/

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Exhibit 15: Instagram User Profiles

Exhibit 16: Ulta Twitter

Source: https://twitter.com/ultabeauty

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Exhibit 17: Ulta Pinterest

Source: https://www.pinterest.com/ultabeauty/

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Exhibit 18: 21 Days of Beauty Poster

Source: Ulta.com

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Exhibit 19: Ulta Distribution Centers

Source: Ulta Beauty 2016 Analyst and Investor Conference

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2 https://www.wsj.com/articles/a-beauty-retailer-that-knows-what-you-want-1466536921

3 https://www.bloomberg.com/news/articles/2017-01-27/ulta-shines-as-rare-bright-spot-in-retail-as-makeup- demand-soars

4 https://www.bloomberg.com/news/articles/2017-01-27/ulta-shines-as-rare-bright-spot-in-retail-as-makeup- demand-soars

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6 https://www.washingtonpost.com/news/business/wp/2016/10/14/ulta-beauty-is-already-on-a-rocket-ride-and- its-ambitions-just-got-even-bigger/?utm_term=.63d72091f46e

7 Millennials Dominate U.S. Beauty Market, eMarketer, December 14, 2016, p. 1.

8 https://www.bloomberg.com/news/articles/2017-01-27/ulta-shines-as-rare-bright-spot-in-retail-as-makeup- demand-soars

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70 http://www.bloomberg.com/news/articles/2015-09-22/can-america-s-biggest-beauty-retailer-take-on- sephora-. 71 http://media.corporate- ir.net/media_files/IROL/21/213869/ULTA_Analyst_and_Investor_Conference_FINAL.pdf 72 http://beautystorebusiness.com/2016-year-retail-redefined, accessed December 4,2016 73 Ulta Annual Report 2015. http://ir.ulta.com/phoenix.zhtml?c=213869&p=irol-reportsannual 74 http://ir.ulta.com/phoenix.zhtml?c=213869&p=irol-reportsannual 75 http://www.fortna.com/13363/ 76 file:///C:/Users/Rita%20Liu/Downloads/ULTA_AnnualReport_2015%20(2).pdf 77 http://ir.ulta.com/phoenix.zhtml?c=213869&p=irol-homeprofile 78 http://media.corporate- ir.net/media_files/IROL/21/213869/ULTA_Analyst_and_Investor_Conference_FINAL.pdf 79 http://fortune.com/ulta-beauty-mary-dillon/ 80 https://www.forbes.com/companies/ulta-salon-cosmetics-fragrance/

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