Ulta Beauty strikes deal to open hundreds of shops at Target stores
Target has struck a deal with Ulta Beauty to open shops with makeup, skincare, hair products and more inside of hundreds of its stores.

Target and Ulta Beauty announced a deal Tuesday to open makeup and skincare shops inside of hundreds of Target stores across the country.

Target CEO Brian Cornell said starting in the second half of next year, shoppers will find a smaller version of an Ulta store in more than 100 of Target's stores and on its website.

Each "shop-in-shop" will be about 1,000 square feet with more than 40 beauty brands and a rotating assortment of products from hair care and fragrances to lip gloss. Customers can shop in person or use Target's same-day services, such as curbside pickup or home delivery by Shipt, to get their online beauty purchases.

Ulta will train Target employees as beauty consultants.

Shares of Ulta were up about 7% to $265.49 at market close. Shares of Target were up about 2% to $158.07 at market close.

Cornell and Ulta CEO Mary Dillon told CNBC they see the strategic partnership as a long-term deal that will catch customers' attention and drive higher sales. They declined to share the length or financial terms of the agreement, but said they will expand Ulta Beauty at Target to hundreds of additional stores over time.

As the coronavirus pandemic shakes up the retail industry and shopping behaviors, Dillon said the retailers are "embracing a time of change to innovate and to lead."

With the deal, Target will gain a unique traffic driver in a fast-growing merchandise category, while Ulta will gain visibility on store shelves and on a website that has expanded its reach during the pandemic.

Both companies will gain a larger audience. Together, they have more than 100 million active loyalty program members across Target Circle and Ultamate Rewards — with more than 33 million of those coming from Ulta.

Target has been able to keep its nearly 1,900 stores open throughout the global health crisis as an essential retailer, selling everything from groceries to throw pillows.

The retailer's profits jumped by about 80% in the second quarter compared with the same period a year earlier. Its curbside pickup service, Drive Up, grew more than 700% during the three-month period. And the company said it attracted 10 million new digital customers and picked up $5 billion in market share in the first half of the year.

As many competitors have struggled, Target has had strength — even in discretionary categories. Its beauty sales grew by more than 20% in the second quarter.

Ulta, on the other hand, was hit hard by store closures. The beauty retailer's same-store sales dropped by 26.7% in the second quarter year over year but have gradually improved. Comparable sales, which is made up of sales at stores open at least 14 months and its e-commerce sales, were down 37% in early May, but recovered slightly and were down by 10% in July when most of its 1,264 stores were reopened.

Beauty sales have been rocky across the industry during the pandemic. Americans have fewer social outings and are working remotely instead of dressing up for the office. About 70% of consumers scaled back their use of makeup this year, according to the NPD Group.

However, some categories like skincare and hand soaps have gained popularity as shoppers focus on relaxation and self-care, the firm found. Hair product sales, for example, rose by 11% in the third quarter, as customers bought hair masks and hair color.

"We are seeing two stories unfold for beauty — one of stagnation and the other of recovery," Larissa Jensen, beauty industry advisor of NPD Group, said in a report.