As Seen in CFO Studio Magazine Q1/Q2 2016 Issue
CREATING A STRATEGIC PLAN AND SELLING IT TO STAKEHOLDERS CAN BE A COMPLEX YET REWARDING PROCESS
BY JULIE BARKER
In 2012, Ulta Beauty, a retail business carrying everything beauty-related— from mass cosmetics to high-end anti-aging creams and services for hair, brows, and skin—had come to a fork in the road, according to CFO Scott Settersten. “We were executing well in areas to drive revenue growth, such as building new stores and adding exciting new products, but we had not taken a holistic view of what investments in people, process, and systems would sustain those revenue-driving tactics and a healthy business over the long term.”
Settersten, who had been with the company since 2005, was appointed Acting Chief Financial Officer in October 2012, when the CFO resigned. Settersten got the CFO job permanently in March 2013. The CEO’s office was also in transition that year; current CEO Mary Dillon came aboard that July. So, late that year, the new leadership team undertook to create a long-term strategic plan.
Investor expectations did not necessarily align with “how the business was actually operating,” nor with “what we thought we really needed to do to support the long-term health of the company,” says Settersten.
The Process
Rather than bring in a consultant like McKinsey or Bain to direct, develop, and craft a strategy, Bolingbrook, IL–based Ulta Beauty developed its own hybrid model with a small internal strategy group that reports up through Finance. They brought in a third party to help facilitate the strategy development with the senior team at various touch points throughout the process. “Senior management was going to own the strategy-development process, because at the end of the day, we were the ones who would have to implement it,” says Settersten. “As a leadership team, we needed to better define What is Ulta Beauty? What do we stand for? What are the strengths and weaknesses of our business model? Then we needed some external subject-matter experts to help us think about competition, our positioning in the marketplace, what the future of retail and beauty might look like from a guest [Ulta Beauty’s term for customer] perspective, and how consumer expectations might also change.”
Brand partners spoke to the group about the beauty category and the competition and where they saw future growth levers. Other subject-matter experts helped the group think through real estate strategies and how to meet guest expectations on the e-commerce side.
The company had been growing rapidly for many years, both through opening new stores and e-commerce growth of 40 to 50 percent each year. “You’re so focused on managing the day-to-day business to support the high growth that you don’t often have time to sit back and think about the future. At the same time, we had made certain assumptions about business drivers that had never been formally tested,” says Settersten.
For example, Ulta Beauty’s now roughly 875 stores include full-service salons, and provide brow and skin services as well. “We had theorized that guests using our service offerings were our most valuable, because of the repeat nature of the service business and the retail product attachment. But we didn’t fully understand how much each guest spent at Ulta Beauty on an annual basis or exactly what types of products they purchased. We also wanted to determine what percentage of our guests used our services and what we could do to get more of our loyalty members to try our services —a huge opportunity.”
The strategy group led the leadership team through a fact-finding exercise, which included a review of historical operating metrics and a deep dive into Ulta Beauty’s data-rich loyalty program. Then Ulta Beauty’s financial planning and analysis (FP&A) team, which also reports to Settersten, got involved, gathering future-looking data from the business units. “We believe it works best for us to have the linkage between strategy and FP&A under the Finance umbrella,” he says. “You eliminate confusion and inefficiencies when everyone is using the same numbers and metrics, and it makes it much easier to link past performance with future financial targets.”
Finally, with the strategy group facilitating, senior leadership created six “strategic imperatives.” These spelled out what future growth would depend upon, from acquiring new guests and deepening loyalty with existing ones, to investing in infrastructure to support growth. And then the team agreed to a timeline to communicate the strategy to its stakeholders.
Countdown to Investor Day
“During the one-year-plus window, job No. 1 for me, the CEO, and our Vice President of Investor Relations, was to manage investor expectations,” says Settersten. “Oftentimes the word ‘investment’ carries a negative connotation to investors, especially when the company’s share price is based on a high earnings multiple.”
In each of the quarterly earnings calls and in meetings with investors during this period, the company fielded questions about the type of investments needed, how much they would cost, and what the implications were to the long-term financial guidance. “We can’t share that with you until we complete the strategy work,” Settersten told them. He promised that the leadership team would announce the complete financial picture at an Investor Day in the Fall of 2014— the company’s first such event.
Some of the investments would be large, such as the cost to reengineer Ulta Beauty’s supply chain, including several new distribution centers with IT systems to help the company better forecast and more rapidly replenish the more than 20,000 products it stocks in each of its stores. These investments would involve, too, large down payments, so there would be short-term deleverage in the profit-and-loss statement in order to capture long-term operating efficiencies.
“We were concerned with how investors would react,” says Settersten. “Of course, we believed the good news was that these investments would improve the guest experience and make us a stronger and more profitable business over the long term.”
Ulta Beauty’s Board of Directors was uneasy too. (See sidebar at right to learn how Settersten worked to calm their fears.) With management and the Board aligned, the investor communications were finalized. The Investor Day was held in Chicago in October 2014, and management’s presentations, including Settersten’s summary of investments, benefits, and long-term financial outlook, were well received. Wall Street’s response was very positive. The verdict? Ulta Beauty’s growth story was strong and clearly communicated.
Ulta Beauty’s stock price soon reached all-time highs. Recently the company’s stock price was in the $185 range, which Settersten attributes to the team’s successful execution against a well-constructed and -communicated long-term strategic plan.
Meanwhile, he and his team have quickly refocused on ensuring the strategy process becomes part of the company’s day-to-day operating activities and now are engaged in a long-term strategy refresh. Ulta Beauty, thanks to the exercise of creating a long-term strategic plan, has a good sense of what it takes to be effective in 21st century retailing.
w. Focus was primarily on the P&L, given that our ultimate goal was to drive profitability. We talked about cost containment, and then also what drives your P&L, and taking a look at the various analyses that our controlling team does each month when we close off a period, and how does that compare to a prior period and what were the differences a result of, and how does it compare to your budget, and what were those differences a result of.