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Ulta’s Mary Dillon Plans For A Gorgeous Future

By Alexia Elejalde-Ruiz Chicago Tribune.

Mary Dillon wasn't a regular Ulta Beauty shopper before she took the reins at the hard-charging cosmetics chain in 2013.

Like many women, she spread her cosmetics purchases around, picking up a lipstick or eyeliner from Macy's, Nordstrom, Walgreens, Target and, on occasion, Ulta.

But the beauty emporium, a one-stop shop for mass-market and high-end makeup, skin and hair products and services, wasn't top of mind.

And therein lay the opportunity.

"My instincts told me, and the facts supported, that Ulta wasn't very well-known," Dillon, 53, said as she recounted her decision to leave her post as CEO of U.S. Cellular to become CEO of Ulta.

"Here I have three teenage daughters. I ought to be there more."

Getting more shoppers to come more often to Ulta is central to Dillon's mission as she builds a foundation for the Bolingbrook-based beauty chain to stay fresh-faced as time marches on.

Dillon, who arrived at Ulta in the midst of its decadelong Cinderella story, has pulled back on the company's breakneck growth to catch its infrastructure up to its ambitions. Under her direction, Ulta is opening distribution centers, streamlining supply chain systems, bolstering e-commerce capabilities and rethinking marketing to focus less on discounts and more on education.

Investors initially balked. Ulta's high-flying share price sank in late 2013 after Dillon announced a gloomier-than-usual outlook and her plan to take the long view.

But the stock has bounced up more than 60 percent compared with a year ago, closing at $133.26 Friday, signaling Wall Street's confidence that Ulta remains the belle of the ball.

"She's taking them to the next level in terms of really starting to make investments that they're going to need for the next five, 10 years," said Daniel Hofkin, an analyst at Chicago-based William Blair, which has an "outperform" rating for the company.

Ulta, perhaps the only place shoppers can get Maybelline, Smashbox, a curling iron and a facial in one visit, is the nation's largest specialty beauty retailer and the fastest-growing by revenue in the specialty beauty industry.

Founded in 1990 by a former president of Osco Drug, Ulta has nearly tripled its revenue since going public in 2007, to $2.67 billion in the fiscal year ended Feb. 1, 2014, as it tripled its number of stores.

The company won't release last year's full results until March, but revenue for the 39 weeks ended Nov. 1 was $2.1 billion, up almost 17 percent from the same period a year earlier, and it expected to add another $1 billion in the fourth quarter. It was on track to have 774 stores by year's end.

Same-store sales growth, which measures performance at existing shops, has averaged a robust 9 percent.

Investment firm Baird estimates Ulta's market share in the specialty beauty category has grown to 15 percent from 6 percent a decade ago. Net income jumped 17.5 percent during the year ended February 2014 and 43.5 percent the year before that.

Despite moderating its growth, Ulta is on pace to open 100 stores per year, down from a record 125 stores in 2013, aiming for a goal of 1,200. It looks to grow online sales to 10 percent of total sales by 2019, up from 5 percent now.

Dillon, a Chicago native, said the first challenge she confronted at Ulta, after former CEO Chuck Rubin left to helm arts-and-crafts chain Michael's, was the need to think long-term in a constantly changing industry.

"Amazon has done something for all of retail, which is resetting the customer expectations about how quickly and easily you can get things," said Dillon, who served as global chief marketing officer at McDonald's before taking on cellphones and then cosmetics.

"Yet we have an experience here in the store that is very relevant and always will be for Ulta."

Her first move, she said, was to craft a senior leadership team that could see the business from the customer's perspective 10 years in the future. With competition increasingly stiff, particularly online, what will differentiate Ulta then?

The public's perception of Ulta is a central issue. About 70 percent of beauty-productsshoppers express knowledge of Ulta when they are prompted with a cue (such as, "have you heard of Ulta"), a lower rate than that of its major competitors.

"Guests who shop at Ulta know exactly what we're about," Dillon said. "People who have not shopped at Ulta or have not shopped at Ulta for a long time have a fuzzy image. And that's what I'm all about sharpening and elevating."

As she walked the gleaming white aisles of the new Ulta Beauty store in the South Loop, Dillon paused in front of a display and grazed her hand over bristles of makeup brushes arranged to form the word "it."

"We call this our petting zoo," she said with a laugh.

The exclusive line of brushes from IT Cosmetics, a brand that made its bricks-and-mortar debut at Ulta, isa point of pride for Dillon, who counts introducing new brands as a strategic imperative. Other recent Ulta debuts include Cindy Crawford's skin care line Meaningful Beauty.

"One thing I love about the beauty industry is that there are so many entrepreneurs, so much creativity, such a fun pipeline of products," Dillon said.

Continuing her walk, Dillon stopped in front of a skin care station where customers can get power peels ($40), microdermabrasion treatments ($65) or 20-minute quick-fix facials ($25) from "skin therapists" trained by Dermalogica.

"This is an area that really I think we're going to get more famous for," she said.

Dillon said many people don't know that Ulta operates in-store salons where customers can get haircuts and color, nail services, skin treatments and false eyelash applications. A growing numbers of stores also have Benefit Brow Bars, for eyebrow upkeep.

Salons constitute a small part of Ulta's sales -- most business comes from its 15 million loyalty members, and fewer than 7 percent of them use salon services. But sales at the salons, not counting those at new stores, grew 10 percent in the third quarter.

Ulta's salons account for less than half a percentage point share of the $48 billion salon market, Hofkin said.

To Dillon, that's an opportunity to find converts, and a key differentiator as online shopping continues its ascent.

"Until Amazon creates a drone that can cut your hair, there's a physical and real reason to come to the store," Dillon said.

Hair services at Ulta start at $36 for a basic cut and style and go up to $162 for a KeraStraight Smoothing Treatment. Haircuts, which people don't trust to just anyone, can be a tough sell.

Laurie Leopold, 32, who lives in the Ukrainian Village neighborhood and runs the beauty blog, is an Ulta regular, but says she wouldn't get her hair done there.

"I have a salon I go to," she said.

Leopold said she stops into Ulta almost weekly during her Sunday errands to peruse the nail polish aislesand appreciates that stores receive hard-to-get products quickly.

But she doesn't view Ulta as a place to discover new brands, which she prefers to do on e-commerce sites that seem to pop up weekly.

"The excitement I get when I go to Ulta is not necessarily that I haven't heard of this brand, but rather that I have," Leopold said.

She views Ulta differently from rival Sephora, which sells premium brands. The French company also has been growing strongly, though in the U.S. it remains a smaller player.

LVMH, which owns Sephora, does not report the beauty retailer's sales individually, but analysts at New York-based investment research firm Sanford C. Bernstein forecast 14 percent annualsales growth over the next few years.

With black, glossy fixtures and thumping music, Sephora exudes a younger nightclub vibe that can feel overstimulating, Leopold said. To avoid that scene, and because she likes the promotion codes and mailed samples, she prefers to shop Sephora online.

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