There may be a surprising (and budget-friendly) reason for Sephora's success

One of the more impressive retail business models we saw during 2023 was at Sephora, the upscale beauty store owned by luxury conglomerate LVMH  (LVMHF) - Get Free Report.

While its success certainly didn't begin in 2023, Sephora saw impressive sales growth and expansion throughout the entire year thanks to quite a few factors. 

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First, Sephora's success can partly be chalked up to simple expansion. After years of absence, the beauty retailer finally returned to the U.K. The France-based store was briefly in England about two decades ago, but never really built out a robust presence and didn't offer shipping.

But after a long wait and a lot of logistical planning, Sephora finally returned to the U.K. in London's premiere Westfield London shopping center, bringing in over 5,000 people on opening day. It later opened a second location in Westfield White City, and the stores are seeing impressive results. 

Sephora doesn't publicly break out its sales by store or region, but its executives mentioned the Westfield location was performing “300% better than we expected within the first eight weeks," according to LVMH Selective Retailing divisional head Christopher de Lapuente.

Sephora continues expanding

It's not just expansion abroad, though. Sephora rapidly began expanding its footprint in pre-existing brick-and-mortar retailers, reducing its setup and construction cost and using convenience to its advantage. 

The retailer announced it would open at least 250 stores in Kohl's  (KSS) - Get Free Report stores throughout 2023, which brings the total Sephora-in-Kohl's count to 850 in over 40 states. 

LVMH called it a "thriving collaboration," it its 2023 year end earnings. 

During Kohl's Q3 2023 earnings report, CEO Tom Kingsbury echoed the sentiment. 

"The partnership with Sephora is phenomenal,” he told analysts on the earnings call. “And we really feel that the numbers we put out there will be achievable in the near future.” 

Kohl's said it saw beauty sales increase by 70%. The retailer expects its Sephora partnership to bring in $2 billion in revenue by the year 2025.

“We saw strong demand across the entire assortment, including skincare, makeup and fragrance,” Kingsbury added. 

This is special for Sephora, since many shoppers who frequent Kohl's are typically popping in for a deal. Kohl's offers lower-priced fashion, accessories, and home goods, but placing the convenience of a more upmarket store within the store might expose potential customers who wouldn't otherwise go out of their way to visit a Sephora on its own.

Sephora is certainly growing on its own, too. 

"Sephora achieved another historic year, both in terms of sales and profit," LVMH writes in its end-of-year earnings report. 

It saw a revenue increase by 25% to $19.4 billion year-over-year, the best performance in all the LVMH buckets. Profit from recurring operations were up 76%. LVMH added that it saw "exceptional performance," particularly in the North America, Europe, and Middle East regions. 

It's no doubt that Sephora is certainly popular in its own right, and it likely didn't need Kohl's to continue on that meteoric rise. Shoppers report seeing an increasingly younger demographic perusing the shelves and clamoring for the latest viral product, and young shoppers tend to be fiercely loyal when a brand is hot  and thus open their wallets more readily. 

Sephora's also been cashing in on the increasing clean beauty trend, which has been popularized by the rise of wellness bloggers and outspoken advocates on places like TikTok and Instagram. Five of its eight makeup best-sellers are Certified Clean at Sephora, which certifies that they don't include ingredients like "parabens, sulfates SLS and SLES, phthalates, mineral oils, formaldehyde, and more." 

The clean beauty industry was expected to expand to $8 billion by the end of 2023, and judging by its over 2 billion views on TikTok and other socials, it's not likely to go away anytime soon.