Premium Brands Keep Flocking to Ulta Beauty

Ulta Beauty (NASDAQ: ULTA) recently reported its fiscal second quarter earnings, and while the company's earnings per share figures beat analyst expectations, management's guidance for the current quarter underwhelmed, sending shares down mid-single digits after hours.

Until the after-hours conference call with analysts, that is. That's when CEO Mary Dillon revealed that Ulta had inked a deal with the mother of all marketing coups -- a Kardashian! Ulta will now be the exclusive retail partner for Kylie Cosmetics, Kylie Jenner's makeup line, which will be rolling out to all Ulta stores before the holiday season.

If you didn't believe in the power of the Kardashian publicity machine, the announcement caused Ulta shares to go from roughly a 5% loss after hours to a 6.4% gain the very next day. In other words, the mention of Kylie Jenner caused Ulta's market capitalization to increase by $1.5 billion.

All about Kylie

Kylie Jenner, who grew up on the reality show Keeping Up With the Kardashians, has expanded her social media following to 114 million Instagram followers, 25 million Twitter (NYSE: TWTR) followers, and roughly 9 million Snapchat (NYSE: SNAP) followers, all by the tender age of 21.

The young entrepreneur leveraged that social media presence to launch her own makeup line in early 2016. Using private label manufacturer Seed Beauty for both manufacturing and packaging, tapping Fool favorite Shopify (NYSE: SHOP) for sales and fulfillment, and employing her mother to handle finance (for a 10% fee), Jenner has made Kylie Cosmetics into a business valued by Forbes at $800 million, even though it only has a handful of employees. Using only direct-to-consumer online channels, Kylie Cosmetics made over $630 million in revenue in just two years.

However, Forbes also estimated that Kylie Cosmetics' growth rate slowed to just 7% in 2017 after the initial explosion in 2016. That may also show the limits of an online-only retailer (even for a Kardashian), and why the young company ultimately inked the recent deal with Ulta.

The magnetic Ulta

Why did Jenner reach out to Ulta? It's likely a reflection of Ulta's business model. Ignoring the distinction between "prestige" and "discount" makeup, Ulta has cultivated a specialty retail environment for "beauty enthusiasts" that includes both affordable discount brands and prestige brands, as well as new "indie" brands such as Kylie Cosmetics and e.l.f beauty (NYSE: ELF).

To give an idea of the breadth of Ulta's appeal, the company also announced a new partnership with skin care brand Kiehl's on the same conference call. Kiehl's is a high-end skincare brand made from natural ingredients that has been around since 1851. Kiehl's had previously only been available in its own proprietary Kiehl's-branded stores and higher-end outlets, but now follows in the footsteps of premium makeup brand MAC cosmetics, which joined Ulta in 2017 after previously being available only through its own branded outlets and high-end department stores.

Look no further than Kylie and Kiehl's to see Ulta's moat

It's a testament to Ulta's business model that it has been able to attract both Kylie Cosmetics, which is only two years old, and Kiehl's, which is 167 years old, all in the same quarter. The flexibility of Ulta's data-driven and diverse product line allows it to adapt to ever-changing trends in the beauty industry, so as long as people continue to want to look good, and mall and department store traffic continues to decline, Ulta should continue to reap the benefits.

While Ulta's stock has been in the doldrums for the past couple years, perhaps the Kardashian bump will finally break the stock out of its rut.

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Billy Duberstein owns shares of Ulta Beauty. His clients may own shares of some of the companies mentioned. The Motley Fool owns shares of and recommends Shopify and Twitter. The Motley Fool recommends Ulta Beauty. The Motley Fool has a disclosure policy.