On Wednesday, Cowen hosted a call with Prama Bhatt, Head of Digital and E-Commerce, Ulta Beauty. During the call, Prama cited several significant factors for continued digital and omni-channel growth, including personalization investments to drive loyalty and conversion, the intersection of digital + physical, and productivity gains/shared inventory/customer transparency across channels. Here, highlights from the call, as reported by Cowen.

Personalization is the Biggest Digital Opportunity

Ulta’s loyalty program, now at nearly 33 million members, is at the core of its personalization capabilities given its vast data set of customer insights. Ulta is leveraging this set beyond transaction data by moving up the discovery funnel and looking at pre-purchase browsing behavior and interaction patterns across price points, categories and marketing touch-points (i.e. emails vs. push notifications vs. ads, etc.). From this, Ulta can build out recommendation solutions, both digitally (chat-bots) and in-store (associates), to help customers easily manage and solve their needs across the retailer’s 500-plus brands and 25,ooo SKU’s.

Cowen’s Thoughts Around the Digital Store of the Future

As Ulta provides “All Things Beauty, All in One Place,” the digital store of the future will leverage technology to simplify problem solving, product discovery and inspiration, and overall store navigation. An example is “endless aisle”, where customers can view assortment between physical and digital channels, and therefore easily identify and purchase with limited friction and/or disappointment. Ulta  already shares a single distribution center and common inventory between online and in-store channels, however providing real-time inventory transparency to customers remains an opportunity that the retailer is working toward.

Cowen Expects Ulta Beauty  Online to Reach $1B by 2020, About 15% of Sales

Management previously targeted 10% digital penetration by FY19 (currently ~12%), although does not explicitly target a penetration figure longer term. Cowen’s model expects online to eclipse $1 billion in sales in FY21, which it also expects will comprise ~15% of overall sales, assuming the current 20% to 30% digital sales growth rate is maintained. Longer term, Cowen does expect penetration to remain in-check versus some Specialty Retail/Softline peers in the greater than 25% range given less than 1% of ULTA guests are online-only. However, Cowen expects digital to remain complementary to the stores as a customer acquisition vehicle through the app/loyalty program and through immersive technologies like AR and AI.

QM Scientific: 100K Factors Per Shopper Enables Deeper Insights

Ulta’s acquisition of QM Scientific weaves AI into its customer communication and segmentation strategy. The technology enables the retailer to segment customers with increased granularity by aggregating over 100,000 factors on each shopper,  allowing Ulta to connect to customers in a highly relevant and hyper-personalized way to maintain high engagement and low churn rates. Other capabilities include: AI-driven predictive analytics on replenishment-oriented products (i.e. personalized notifications when a certain product is running low), streamlined product discovery processes to drive sales per search, and innovation around conversational commerce to improve efficiency and accuracy (i.e. “Alexa, find me mascara for under $20.”) Note that Ulta currently has ~7% U.S. market share and ~30% share of wallet among its customers, and Cowen believes that improved connection with customers is key to driving both market and wallet share gains.