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Ulta Beauty CFO: “The Great Recession Was A Walk In The Park”

Like other large retailers, Ulta Beauty was hit hard by the pandemic, but unlike those that have fallen, the cosmetics company has survived through months of chaos. CFO Scott Settersten explains how.

In part one of this two-article series, Scott Settersten, CFO of cosmetics, fragrances and skin care products retailer Ulta Beauty, had made a series of tough decisions, beginning with canceling the company’s annual 2,000-person-strong general managers meeting and culminating in the closing of all 1,254 stores on March 19.

Through the end of April, other decisions included furloughing store employees not deemed essential to serving customers, renegotiating payment terms with landlords and vendors, and reassessing the company’s cash position and future cash flow, compelling the CFO to draw down $800 million of Ulta Beauty’s $1 billion revolving credit facility.

We pick up the story at the beginning of May, when some state and local governments were beginning to relax store closure mandates, only to flip-flop in the weeks and months ahead. For the retail industry, this disordered approach made it especially difficult to plan ahead.

“It wasn’t a situation of turning on the lights all at one time,” Settersten explains. “We’d reopen 150 stores one week, 80 the next and 130 the week after that. In some places like Texas and California, we’d open the stores and then have to close them again. It was a complex mosaic, made more complicated by some local requiring customers to wear masks and others not requiring them.”

The Search for Clarity

To help stay on top of the fast-changing mandates, Settersten repurposed Ulta Beauty’s long-term strategy organization, which traditionally focuses on market and geographic growth, into what he calls a “stabilization team.”

“I told the team we really didn’t need to worry about things like M&A or new stores for the time being, we needed to focus on how to safely reopen existing stores, remain complaint with regulators and governments, and manage employee and customer feedback, given social issues like the wearing of masks and social distancing,” he says.

The lack of clarity on these social issues, with many but not all localities requiring masks, was dividing the public. Social media videos of in-store conflicts between retail between store patrons and personnel trying to enforce the rules had gone viral. The lack of uniform regulations led the National Retail Federation to complain to several major news outlets that the differing rules were confusing shoppers.

To manage the situation, Ulta Beauty decided that in the stores that had reopened, store associates would wear masks and socially distance themselves from customers “irrespective of what the rules were in that locality,” Settersten says.

Furnishing a Forecast

At the same time, he and the finance team took their first swipe at forecasting the business impact of the pandemic. “We dug in to posit what the rest of the year might look like from an operating and financial standpoint,” he says. “We also wanted to get our arms around 2021, knowing most investors were already calling 2020 a `write-off year.’”

To put together this long-term outlook, the finance team reassessed sales, profit margins, liquidity and capital allocations. “We also looked into our real estate strategy and merchandise assortment because the products we historically sold pre-Covid was different than what we were now selling,” Settersten says.

He explained that cosmetics traditionally lead product sales but with consumers working from home and worried about their health and wellbeing, they were purchasing self-care products like skincare and hair-care. “When there’s no sporting events, concerts, shows and parties to go to, there’s less need to `glam up,’” Settersten says.

In projecting the company’s long-term prospects on a market and geographic basis, traditional year-over-year comparisons were wanting, as what happened in the pre-Covid sales environment had little to do with present sales environment. Customary market demand analyses using metrics like consumer discretionary income, for example, were imperfect indicators due in part to the federal government’s stimulus package, which supported extra unemployment benefits and forgivable loans that at some point would run out.

Another challenge was determining the degree to which people now buying products online “would drift back to buying them in stores,” Settersten says.

Like other retailers, Ulta Beauty sells products via an omnichannel approach, giving consumers the opportunity to buy online from a mobile device and a laptop or in a brick-and-mortar store. But it’s inside its stores where they absorb what Settersten calls “the true guest experience,” the retailer’s high-touch hair, skin and eyebrow services.

In putting together a roadmap, the finance team “rethought everything,” he says, plotting sales prospects and expenses in a V-shaped recovery, a W-shaped recovery, and even a Nike-like swoosh recovery. Ultimately, two major decisions were reached.

“We had planned to open around 70 new stores this year and reduced thatt to about 30, and our plans earlier in the year to build the infrastructure to become an international business, launching first in Canada and then overseas, were delayed,” he says.

Summer Solstice

By the end of June, roughly 90 percent of Ulta Beauty stores had reopened with shorter hours of operation to match labor with demand, although not every store offered makeup and other salon services because of compliance reasons and company concerns over the health and safety of store personnel and guests. In mid-July, Ulta Beauty’s entire fleet was now open for business, although many still maintained shorter hours.

The finance team now put its collective intellects and energy to evaluating holiday sales trends and plans. The traditional Black Friday advertising blitz was tempered as Ulta Beauty (and most other retailers) have decided to close all stores on Thanksgiving. Great sales deals are being promoted primarily through the ecommerce channel.

“With ongoing health concerns and social dynamics, we’re being very cautious about the rest of the year, not knowing whether we’re all out of the woods,” says Settersten. “We’re being very careful about inventory buys and are super focused on disciplined expense management.”

The latter will be evident over the Christmas holiday season. “We plan to tighten up where we can without putting the business at risk, thinking about how to decorate our stores and the breadth of our marketing and television ad buys,” he says.

As September dawned, the CFO looked back at the past nine months, encompassing the biggest crisis over his career in finance, he says. “The Great Recession was a walk in the park, relatively speaking, to what we’ve been through and are still dealing with—not just the pandemic, but also a recession, social unrest and a highly contentious election,” he says.

Nevertheless, his instincts and experience tell him the worst has passed. “Initially it looked like the country would pull through pretty quickly but by March the picture darkened,” Settersen says. “Suddenly, everybody was sheltering in place and it was scary—there’s no better word for it. For the first time since this company was launched in the 1990s, we wondered if we’d come out intact.”

Ulta Beauty did just that. As he puts it, “Our fleet is open and while it’s uncomfortable and not fun to wear a mask in a high-touch business, we survived and expect to start strong again in 2021. Many other retailers weren’t so lucky.”


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