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Ulta Beauty CEO on the state of the cosmetics industry amid the pandemic

Ulta Beauty CEO Mary Dillon joins Yahoo Finance Live to discuss the company's most recent quarterly results, which topped analyst's estimates, and the state of the cosmetics industry amid the coronavirus pandemic.

Video Transcript

BRIAN SOZZI: OK, Ulta Beauty shares are in focus this morning after the personal care retailer beat sales and earnings estimates for the third quarter. Let's welcome in Ulta Beauty CEO Mary Dillon for a chat. Hey, Mary, good to finally speak with you here. You know, I was talking to a couple of my analyst friends on Wall Street this morning, and they all point out, yes, you know, the cosmetics business is under a little bit of pressure, but you are seeing growth in some other areas of your business right now. Where are you seeing that growth?

MARY DILLON: Yeah, absolutely. Well, first of all, thrilled to be here, and we're thrilled that we had a very strong quarter in a difficult time, but we're seeing very strong demand signals for beauty at Ulta Beauty and in particular categories like skin care, which has been very trendy for a while and has really taken off during the pandemic where more people are experimenting with skin care routines and rituals, and it's a wonderful form of self care. So skin care a very important category, strong results.

Also things like fragrance and bath, again a category of self-care, double-digit positive comps. Hair care, so more do it yourself hair, whether it's hair color or whether it's styling tools. So, you know, makeup is under some pressure, of course, because most often we're outside, we're wearing a mask or we're not going to the same places, but we're very confident as the economy recovers that those kinds of behaviors will start to come back. So but lashes and brows still very hot. So I would say we feel really good about the consumer situation at Ulta Beauty.

JULIE HYMAN: Mary, it's Julie here. Thanks for being with us. I find it so fascinating, we've been talking about on the show the notion that people are sort of focusing above the mask with a lot of their beauty regimen. We've all been trying to figure out what the world was going to look like after this and what's going to come back, and you say you are confident about it. What kind of indications are you getting? I mean, none of us can look into a crystal ball, right? But what are you hearing from the employees in the stores in terms of what they're hearing from clients? Are people anxious to get glammed out and go out again?

[LAUGHTER]

MARY DILLON: Yeah, well, first of all, I'm so proud about how the Ulta Beauty associates have led through this challenging period, right? So whether it's our store associates engaging with guests at a whole new way, whether it's our distribution center associates making sure they meet the really high commerce demand that we're seeing, and what we've seen as we started to reopen our stores, guests coming back to stores. Certainly still not at the level that we had a year ago, right? It's building, but it proves the thesis that people love to shop for beauty at Ulta Beauty in person, to have an exchange with our associates, to learn about new products.

We have a great digital tool called Glam Lab where you can virtually try on thousands of products, whether it's lip or eye or brow shapes or hair color. We also have a skin advisor. So the point is that what we see is that the engagement in beauty at Ulta Beauty is very strong. And you know, so you can also see it when people are experimenting with new ways to do eye shadow or their brows, even with a mask, that the demand is there.

So we know that, you know, as people continue to go back at some point to their more normal rituals, but even being on video. I mean, that's great. I'd rather have folks on video than audio, because they like to to glam up a little bit for that as well. So I think all indications that we see are quite positive for the business, and I think at Ulta Beauty, again, I'm just, I'm really proud about how our team is executing at a challenging time. There's no question it's a challenging time.

MYLES UDLAND: Mary, it's Myles here. I want to talk to you about opening stores. You guys still opened 17 stores in the last quarter. I live right down the street from a big beautiful location you opened I think last year on the Upper East Side here, and I'm curious if this period has had you rethinking the role that stores play or if the roadmap that you maybe saw for the business a couple of years ago you feel like is still going to come back when we, you know, get to say 2022, 2023, when, you know, life hopefully kind of looks normal.

MARY DILLON: Yeah, such a great question. You know, what we know and we've proven time and again is that beauty is physical and it's digital and it's even emotional, right? There's a lot of aspects to it. And for the most part, the beauty enthusiast, which is the consumer that we love and focus on at Ulta Beauty, loves the in-store experience also as well, of course, services have to be done in-store. We do hair and brows, and in the future, we'll bring back makeup and skin, right?

So what we see is that the physical aspects of beauty and shopping for beauty at Ulta Beauty is still very important. Of course, there's been an acceleration of e-commerce participation, which is great, because we find that the guests at Ulta who start out in store and also become online shoppers spend, they get even more engaged, right? They spend three times as much. So stepping back, what I'd say is that we've long always been thinking strategically about what are the shifts happening in consumer trends and channel trends and competitive trends, and what does that mean for our entire business model?

And we are reaffirming that we believe we absolutely have the potential for 15 to 1700 stores in the US and that those stores will be about a full service experience and trial and discovery and services, which the beauty consumer proves time again that they are very excited about. We've been opening up new stores recently, and they're opening up well. So I mean, different expectations, and if we weren't in a pandemic, certainly especially on the services side. So we feel like, you know, it's always something that we have to keep an eye on. We've got great real estate opportunities. We look at that very closely, but we feel confident that that business model will continue to be very important for us.

BRIAN SOZZI: Mary, let's stay on stores, and I stumbled upon a pretty crazy stat from Jefferies, and they said 76% of Ulta stores are within five miles of a Kohl's store. Now, that's important, because you just signed a deal with Target to start opening up Ulta stores within Target next year, and Kohl's is now moving forward with opening Sephora stores inside their stores.

MARY DILLON: Right.

BRIAN SOZZI: How intense do you expect this battle to get next year and moving forward?

MARY DILLON: Well, it's a dynamic marketplace, but we are so thrilled about our partnership with Target Corporation. I mean, it is just a wonderful opportunity we think for guests, for the beauty industry, for Ulta Beauty and for Target as well. And why is that? Well, first of all, these are two great retail companies that have great brand DNA that's similar, team dynamics, culture. You know, Brian Cornell is a fantastic CEO who I know well, and so we know that the partnership is going to be strong.

More importantly, we see the opportunity to bring Ulta Beauty's beauty authority and expertise and great brand partnerships to the millions of customers that go through Target each and every week who are looking for new things to try and discover. And so we have built a model we believe with, and we're just starting, with Target that is going to create some great trial and discovery, growth for our guests, growth for our brand partners as well as for our companies at large. So we're very excited about it, and we're just getting started, but I think it's going to be a great new chapter for both of us.

BRIAN SOZZI: Yeah, I know a lot of folks are very excited to see those stores. You know, you touch upon November sales on the earnings call last night. What are you seeing in the business? Really, I think a lot of folks out there are seeing holiday sales, you know, start off on the sluggish side of things.

MARY DILLON: Yeah, well, again, we're in the quarter, so we are not going to provide a lot of details, but what I did say on the call and I'll reiterate, we feel encouraged with what we've seen so far. Like many retailers, we've had to rethink the entire cadence of Black Friday and of holiday. We started earlier. We started earlier in November, and again, what I'd say is that beauty as a gift giving category at Ulta Beauty for the season we think is more relevant than ever, and we're seeing that in how the early start looks.

So when you think about, you know, the ability to give products that, you know, bring joy and warmth and to your friends and to your self, self care, whether it's skin care sets or fragrance sets, new makeup innovation that's been launched that's doing very well. So I would say so far, and most importantly too, is that we have great ways that you can shop at Ulta Beauty. So whether you come to our store and you're shopping in our new shop safe standards, right, or ordering online, or ordering ahead and having curbside pickup or pick up in-store, we're going to continue to have all those options open obviously throughout, because that's what we do, and we know that that's going to give guests many options as we get closer to the holiday itself.

JULIE HYMAN: Mary, finally, I want to ask you about the jobs picture. As you know, it's jobs day. We've been talking about the 245,000 jobs being added in November. What is your cadence of hiring or not look like right now, especially with, you know, stores that are not necessarily fully opened, traffic that is definitely not back, what does this holiday season--

MARY DILLON: Yeah, well, I was encouraged--

JULIE HYMAN: Look like in terms of hiring?

MARY DILLON: I was encouraged as well like all of us in business to see the jobs number continue, and it's so important. So relative beauty, yes. I mean, I would say that we have many associates that have come back that were furloughed as we had to close all of our stores for seven and a half weeks, and yet, we're not all the way back in terms of even capacity in our stores across the country given local regulations, so we will continue to moderate and pace that as we go to make sure that we give our guests a great experience, our associates a great experience, and you know, we anticipate obviously as we get past the time of the pandemic, vaccine news is very encouraging, right, that we'll be at more full capacity hopefully sooner versus later.

JULIE HYMAN: Mary Dillon, the CEO of Ulta Beauty, thank you so much for being here. We really appreciate it.

MARY DILLON: Mm-hmm. It was fun. Thanks a lot.