Even in the depths of a recession, a slight change to your
look, like a fresh splash of color on your hair, nails or eyes,
can make you feel like a million bucks.
It's a quiet fact. But it has been enough to keep the health
and beauty industry -- to the surprise of many analysts --
purring during the recent economic downturn.
Hard times may, in fact, have helped what supply and salon
chainUlta Beauty (
) says has grown to a $96 billion industry, by coaxing women and
men to small, feel-good splurges like a new lipstick or a workout
"If someone is tight on what they have to spend they might see
a hot new color but instead of spending $50 or $100 for a blouse
they can spend $4 or $5 for a lipstick or nail polish so they
don't have the guilt factor," said Ulta CEO Chuck Rubin.
And Americans aren't just pampering themselves. Dogs and cats
have graduated from being guard animals and rodent exterminators
to being members of the family. Owners are spending accordingly,
) to gather an increasing share of the pet supply chain.
The combination has driven the stocks in IBD's specialty
retailers group to one of the top performances among industries
over the past 12 months. The group ranked No. 13 out of 197
industry groups on Friday. Two of its leaders, Ulta Beauty andGNC
), are on the IBD 50 list.
Mutual funds have played a leading role in helping to drive
"Performances have been phenomenal relative to the market
overall," said Peter Dixon, portfolio manager of Fidelity's
Select Retailing Portfolio. "People should be attracted to the
industry because there feels like there always is a brand people
want to buy; there are always opportunities to make money in
Many specialty retailers matured during rapid expansion in the
1990s, according to Scott Mullinix, portfolio manager of the
Nuveen Mid-Cap Growth Opportunities Fund.
The fund owns positions in PetSmart, GNC and Ulta Beauty.
While mature markets mean the end of the line for many growth
stocks, it holds specific advantages for some specialty
"They've become oligopolies and they've learned how to grow
beyond square foot growth," he said.
Retailers make money in one of three ways, Mullinix says: by
having the lowest prices, the best selection or best customer
service. Successful companies have one or two of those
attributes, he said. It's nearly impossible to have all
PetSmart offers 10,000 products for dogs, cats, birds, fish
and other pets. While many of the toys, leashes and grooming
products can be found online, shipping large amounts of heavy pet
food to feed a Labrador can be expensive.
A nail polish or bottle of shampoo would not be expensive to
ship, but the beauty retailers beat big-box retailers likeTarget
) andWal-Mart (
), and online retailers by the breadth of the products they
offer.Sally Beauty Holdings (SBH) offers 78 shades of hair color
vs. the 12 you typically find at a drugstore. Ulta Beauty offers
20,000 products in stores and online and Sally Beauty offers
8,000 to 10,000 per store.
Navigating the world of supplements can be confusing. What
protein product should an Ironman triathlete buy for maximum
performance? What vitamin combination is best to stay healthy
during flu season? GNC and Vitamin Shoppe employees can answer
those questions and more, encouraging consumers to come to their
stores for expert advice.
Specialty retailers often outflank online, big-box and
discounter competitors by offering the added value of special
products or advice to entice consumers to their stores.
Choice is a luxury of upper-middle class consumers. Both GNC
and Vitamin Shoppe say their customers are well-educated with
higher-than-average income. Specialty retailers in general focus
on attracting young consumers and making them customers for
"As people are getting older, they want to buy more vitamins,"
said Kurt Frederick an analyst from Wedbush Securities. "The
younger generation that shops at GNC is very fitness
More than 40% of GNC's customers are 35 or younger. The
company reports that 80% are under 55. In 2011, GNC held 26% of
the sports nutrition market. It expects its share to grow to $1.3
billion by 2017.
GNC has 3.5% of the supplement market share and Vitamin Shoppe
has 2.7%. Specialty retailers have 36.7% of the overall market.
Mass marketers, including big box retailers and drug stores,
still hold another third of the market. The rest is fragmented
among smaller shops and online retail.
Shampoo isn't a discretionary -- i.e., optional -- good, but
during the recession many consumers have switched from high-end
brands to slightly cheaper names.
"A lot of those people that traded down to more affordable
salon brands found that those brands were just as acceptable as
the really high-end brands," said Sally Beauty CEO Gary
Winterhalter. "But in the history of the industry people haven't
switched from Paul Mitchell to VO5 if a person really believes
that a prestige brand works better; they aren't going to switch
all the way down to a mass market brand."
The variety of shampoos and other products Ulta and Sally
Beauty offer allow them to get customers at all price points.
The American Pet Products Association says spending on pets
will grow about 4% in 2012 to $52.87 billion. PetSmart has 14% of
the pet food, toy and pet product industry. And it is
"Customers are concerned about the health and welfare of their
pet and (these) oligopolies are defensive because people aren't
going to stop feeding their pet. We like PetSmart a lot,"
Mullinix can rattle off a laundry list of some specialty
retail's attractive attributes. Near the top, their limited
exposure to global economic problems. PetSmart, Vitamin Shoppe
and Ulta Beauty operate domestically and the majority of GNC and
Sally Beauty stores are in the U.S.
Also, when it comes to consumers, wealthy often equals
"If you only study higher-end consumer you see that they are
getting healthier, and consumers with money want organic and
healthy products" Mullinix said. "Healthy offerings are a
consumer growth industry."
The aging baby boomers are trying to ward off the effects of
aging with vitamins and supplements along with healthy eating to
promote longevity and continue living active and fulfilling
Smartphone subscribers in the U.S. have risen 13% since
October to 101.3 million, according to market research firm
comScore. Retailers have been capitalizing on consumers' growing
dependence on the technology.
There is an app for pretty much everything these days. GNC's
LiveWell app not only lets customers buy products but also helps
them to find stores, get special deals and learn more about a
product. Sally Beauty and PetSmart have similar apps all
available for free.
GNC reported a 34.1% increase in first-quarter online sales
vs. fourth-quarter sales.
New technology also allows specialty retailers to improve
inventory management, track customers' orders and monitor web
viewings to better target consumers with the right products,
according to Frederick.
Fund managers aren't very optimistic about the retail sector
in general, but are bullish on specialty retailers.
"I don't have a very high confidence level in the retail
industry, because I would have to have confidence that
unemployment would drop and disposable income would rise," Dixon
said. "But I do have confidence in companies in the
Mullinix is expecting the healthy lifestyle trend to continue
"My confidence level in the industry is high. You've got
disciplined companies operating in specific sectors," he
Unique product offerings of defensive goods like shampoos and pet
food and a knowledgeable staff keep customers coming back to
Consumer spending could drop if unemployment rises. Companies in
international markets could be adversely affected by the mounting
problems in Europe and slowing growth in some developing