In The Headlines
Ulta’s Formula for Success in a Competitive Cosmetics Market
A tight focus on cosmetics and fragrances has given beauty products retailer Ulta an edge over drugstores and department stores. Offer a broad assortment of beauty products, cosmetics, and fragrances across the price spectrum. Add low-pressure but high-touch customer care. Then mix in salon services like hairstyling and brow tinting. Together, these elements make Ulta Beauty a one-stop beauty shop—and one of the hottest stories in retail.
The 800-store chain has found a profitable niche in the intensely competitive beauty market—between the Walmarts and Walgreens of the world, which cater to casual customers looking for bargains, and the Macy’s and Neiman Marcuses, where women will pay a premium for pampering. The result has been staggering growth, especially by the sluggish standards of brick-and-mortar retailing. Ulta’s sales have risen 82.5% since fiscal 2012 and are expected by analysts to hit $3.8 billion this fiscal year. And Ulta is not running out of steam: The first quarter of 2015 saw it post its best same-store sales performance in three years, while online sales rose almost 50%.
CEO Mary Dillon says Ulta’s singular focus keeps customers happy. “It’s really a fun beauty destination,” she says. “It’s not a chore.” The company has one of the most successful loyalty programs in retail, with 15.5 million members who account for more than 80% of its revenues.
Ulta’s strategy is to benefit from a change in where women, especially younger generations, purchase their beauty products. As department store operators have consolidated and slumped in recent years, specialty stores (such as rival Sephora) have been looking to capture a bigger share of the market for prestige beauty products. To that end, Ulta is focused on expanding its range of higher-priced “prestige” products, which represent the beauty industry’s highest growth category. As part of this push, Ulta added popular fragrance brands.
It is also working to drive more customers to its revenue-generating salon areas for hair, nail, and facial treatments. A cornerstone of the Ulta business is its work to build customer loyalty. The beauty retailer maintains an ULTAmate Rewards program (for purchase-based points) and a nationwide program that offers certificates for free beauty products.
But Ulta still faces stiff competition from bigger retailers that stock their cosmetics near the corn chips and kitchen appliances. The beauty market is growing fast—Euromonitor International forecasts growth of 5.3% a year through 2019—and it is a vital traffic generator for drugstores and department stores. Walgreens, Target, and CVS Pharmacy have made improved beauty sections a priority, while J.C. Penney is modernizing its 850 hair salons in partnership with InStyle magazine and rolling out more Sephora cosmetics boutiques within its stores.
To maintain momentum, Dillon unveiled a multiyear plan in 2014. Ulta’s store fleet is set to reach 1,200 locations by 2019. Ulta is also doubling down on its high-end segment, rolling out boutiques for pricey brands like Lancôme and Clinique at 100 stores each and counting. And Dillon aims to get e-commerce up to 10% of sales by 2019, from 5% now. Her plans seem to have impressed Wall Street: Ulta’s market value has risen 68% since she became CEO in 2013.
Citations
1. http://for.tn/1Lj0hFf – Fortune
2. http://bit.ly/1Jppdal – Vault.com Business
Childcare Costs are Eating Up the Budgets of New Families
It is not the cost of diapers or even future college tuition that is causing concern among many new parents. It is the cost of daycare. With the job market improving and the millennial generation born after 1980 reaching its prime child-bearing years, demand for daycare will probably continue to outstrip supply, driving costs up faster than overall inflation. That could have wide-ranging economic repercussions, including limiting consumers’ ability to spend on other goods and services and, possibly preventing some parents from joining the workforce.
About 29% of births last year were to 25- to 29-year-old mothers, according to National Center for Health Statistics data released in June. The figures also showed that the fertility rate, or the total number of births per 1,000 women aged 15 to 44 years, increased for the first time since 2007. Childcare providers are finding it difficult to keep up as scant public funding and more expensive food and rent propel costs. That crimps their ability to hire staff, with payrolls in the industry rising 3.7% since the start of the expansion in June 2009, compared with an 8.5% gain for all employers, according to the Bureau of Labor Statistics. At the same time, there has been a growing push for childcare workers to be better trained and educated, and the costs associated with those efforts make it tougher for managers to offer pay increases for existing personnel, said Anna Carter, president of the Chapel Hill, North Carolina-based Child Care Services Association.
The mismatch in supply and demand has made childcare a “broken market,” said Marcy Whitebook, director and founder of the Center for the Study of Child Care Employment at the University of California at Berkeley. “We now have sort of 21st century expectations and we still have, in some ways, a 20th century system,” where “everybody’s doing everything on a shoestring,” said Whitebook. “It’s probably a safer bet to open up a restaurant than a childcare center.”
Married couples who enrolled an infant at a center last year spent from 7 – 15% of their family income on full-time care, according to data from Arlington, Virginia-based Child Care Aware of America released in May. Expenses in some of the largest states, including California, New York and Illinois, were at the top of the range. Weekly nursery and pre-school expenditures for children five years old and younger rose almost 50% between 1990 and 2011 after adjusting for inflation, according to Census Bureau data analyzed by Chris Herbst, an associate professor at the Arizona State University School of Public Affairs in Phoenix.
To keep costs down, more parents are turning to informal arrangements, including asking for help from the army of retiring baby-boomer grandparents—what Herbst calls “stiffing Grandma and Grandpa.” Childcare by relatives climbed to about 27% of the total in 2011 from 21% in 1990. Weekly expenses for that type of care declined by 13% over the same period, according to Herbst’s analysis. The costs of childcare and nursery school have surged 168% since the end of 1990 compared with a 76% increase in total consumer prices, according to the Bureau of Labor Statistics.
Sluggish wage gains since the last recession ended have made those childcare bills look even bigger. “It’s taking up more and more of a family’s paycheck,” said Carter of the Child Care Services Association. Little public funding for childcare also could be keeping some women from joining the workforce, Francine Blau and Lawrence Kahn, Cornell University economics professors, wrote in a January 2013 research paper. Government assistance for child care in the U.S. increased to 0.11% of gross domestic product in 2007 from 0.03% in 1990. Over the same period, it grew to 0.47% of GDP from 0.35% in 16 member countries of the Organization for Economic Co-operation and Development.
High costs may be preventing some Americans from seeking jobs. Since rising to a record 60.3% in 2000, labor-force participation of women 16 and older has been declining, according to Labor Department data. In July, the rate was 56.7%. The trend is coincident with a rise in stay-at-home mothers and fathers, according to Census Bureau figures compiled by the Washington-based Pew Research Center. About 29% of mothers with children younger than 18 did not work outside the home in 2012, up from 23% in 1999, which was the lowest in data back to 1967. The number of stay-at-home fathers almost doubled over the period, to 2 million from about 1.25 million.
Citations
1. http://bloom.bg/1Khq0Ll – Bloomberg
The Good News Is . . .
• As interest rates fell on concerns about events overseas, mortgage refinances surged. Total mortgage application volume rose 3.6% on a seasonally adjusted basis for the week ending August 14, 2015 vs. the previous week, according to the Mortgage Bankers Association. Refinance applications were the driver, jumping 7% from the previous week to the highest level since May, 2015. The refinance share of mortgage activity increased to 55.5% of total applications from 53.1% the previous week.
• Target. Corp., a leading retailer, reported earnings of $1.22 per share, an increase of 20.8% over year earlier earnings of $1.01 per share. The firm’s earnings topped the consensus estimate of analysts by $0.11. The company reported revenues of $17.4 billion, a 2.8% increase. Management attributed the company’s results to increased store traffic, strong sales in its signature categories and improved operating margins.
• Zulily, the flash-sales site for mothers, announced its agreement to sell itself to Liberty Interactive, for $2.4 billion, or $18.75 a share in cash and stock. Acquiring Zulily gives QVC a chance to bring the flash-sales site’s vendors onto its own platforms, particularly on television. QVC has been focused on bolstering its e-commerce. Both companies target a similar customer: higher-income women who like to shop, and shop often. Under the terms of the deal, Zulily investors would receive $9.375 in cash and a 0.3098 share of the QVC tracking stock for each Zulily share they own.
Citations
1. http://reut.rs/1JdDd80 – Reuters
2. http://cnb.cx/1gct3xa – CNBC
3. http://bit.ly/1KEUozh – Target Corp.
4. http://nyti.ms/1HRH3ll – NY Times Dealbook
Planning Tips
Tips for Avoiding the Pitfalls of 529 Plans
Utilizing a 529 plan to save for a child’s education expense can make a lot of sense. After all, if you are going to save anyway, you might as well take advantage of every tax break available. While a 529 plan may not give you an up-front federal income tax deduction, your contributions grow tax-free and you will not be taxed on withdrawals as long as they’re used for qualified expenses. In spite of their well-known benefits, 529 plans are not without potential drawbacks. Below are a few pitfalls to watch out for.
529 plans carry investment risk – A 529 plan account may have special tax advantages, but just because it is a special account for college savings does not mean your investments are guaranteed to grow. Like any other account, performance will depend on investment selection and market conditions. People can, and do, lose money in 529 plans. That said, there is more than one kind of risk. By being overly conservative you could fail to meet your long-term goals, especially in a low interest rate environment. But do not take on more risk than you can tolerate, especially as your time horizon shortens.
Failing to update beneficiaries when your spending expectations change – Your child or grandchild may receive a full scholarship or decide not to go to college for a number of reasons. As owner of the account, you can switch beneficiaries to another qualified family member without incurring any penalties, income tax or gift tax. You can even make yourself the beneficiary.
Limited investment options – For college savings plans, your investment choices are limited to the pre-established investment portfolios offered by the plan; prepaid tuition plans give you no opportunity to choose your investments. Also, college savings plans are not legally required to let you change the investment option on your existing contributions once per calendar year or allow you to choose a new investment option for any future contributions (though most plans do give you this flexibility).
Fees can reduce your investment returns – 529 plans charge various fees and expenses to cover investment expenses and the administration of your account. Some 529 plans have high fees, which ultimately means less money for college. The most recent figures from Morningstar show annual fees ranging from 0.08 to 2.38 percent.
Coordinating withdrawals across multiple plans – If a parent and grandparent each have 529 plans, failing to coordinate withdrawals can lead to a tax and penalty for one of them. They cannot both claim their 529 dollars are paying the same education bills, or “double-dip” on the tax break. Plan with your financial adviser how to structure withdrawals annually. Or the grandparent can transfer his or her 529 to the parent.
Citations
1. http://onforb.es/1hBYIbR – Forbes
2. http://bit.ly/1NDXWHp – Charles Schwab
3. http://bit.ly/1NuNiUf – AARP
4. http://ti.me/1PL6mfh – Time
5. http://bit.ly/1EPIUHm – 360FinancialLiteracy.org
