Ulta Beauty (NASDAQ:ULTA) is the top beauty destination for U.S. teens, according to Piper Jaffray's latest "Taking Stock With Teens" survey. Ulta claimed a 38% mindshare in the fall survey, compared to a 26% share for its closest rival, LVMH's (OTC:LVMUY) Sephora.

That gap has been widening. In Piper's spring survey, 33% of respondents chose Ulta, and 31% chose Sephora. In last fall's survey, Sephora and Ulta were tied at 34%. Ulta's rise is bad news for LVMH, but it's even worse news for J.C. Penney (NYSE:JCP), which relies heavily on Sephora's store-within-a-store locations to attract shoppers.

A makeup artist applies lipstick to a woman at a Sephora store inside a JCPenney.

Image source: Sephora.

How much does J.C. Penney need Sephora?

Sephora operates about 660 locations in over three-quarters of J.C. Penney's stores in the United States.

LVMH and J.C. Penney don't disclose their sales figures from this partnership, but Fortune once claimed that they generated nearly $600 in sales per square foot -- compared to just $121 per square foot for J.C. Penney's stores in 2018. That difference indicates that J.C. Penney needs Sephora, but the reverse might not be true.

Sephora operates over 2,500 stand-alone stores worldwide with an expanding base of over 460 these stores across the Americas. But its J.C. Penney locations are stuck in a sinking boat, based on the department store chain's dismal performance over the past year:

Metric

Q2 2018

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Comps growth

0.3%

(4.5%)*

(4.0%)*

(5.5%)

(9.0%)

Data source: J.C. Penney quarterly reports. *Shifted basis.

Back in February, J.C. Penney CEO Jill Soltau claimed that the company and Sephora were "on the same page" and that the relationship was "very strong and very exciting." Senior VP of finance Trent Kruse also noted that the companies would launch "exclusive and new trending brands" together.

But J.C. Penney hasn't said much about the partnership since then. During the most recent conference call, Soltau only briefly mentioned that Sephora's beauty products helped shoppers "complete the look" along with its jewelry, handbags, and shoes.

Ulta wants to take down Sephora

Earlier this year, UBS analysts warned that Ulta was intentionally targeting Sephora with its expansion across the U.S.

A beauty vlogger introduces cosmetic products.

Image source: Getty Images.

Sephora ended 2018 with 1,174 U.S. stores, and it increased its store count to 1,213 at the end of the second quarter of 2019. Sephora previously stated that it would open about 35 new stand-alone stores in the U.S. this year, while J.C. Penney shuttered 27 locations so far in 2019.

UBS claims that Ulta has already opened stores within a 10-minute drive of nearly 80% of J.C. Penney's Sephora stores -- and that percentage could keep climbing. Ulta's comps growth over the past year has also easily outpaced the struggling department store, which suggests Ulta is successfully poaching shoppers.

Metric

Q2 2018

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Comps growth

6.5%

7.8%

9.4%

7.0%

6.2%

Source: Ulta Beauty quarterly reports.

Ulta attributes its growth to an exclusive brick-and-mortar partnership with Kylie Jenner's Kylie Cosmetics, which counters Sephora's Fenty Beauty; its introduction of new brands like Morphe, Revolution, and Jeffree Star -- which all have massive social media followings; and a growing loyalty program with 33.2 million members.

In short, Ulta's younger brands -- along with its stores which offer salon, brow, and skincare services -- are pulling gen Z shoppers away from the competition. Sephora is fighting back by launching new products for teens, recruiting social media stars to promote its brands, and launching new subscription boxes for $10 a month -- but Piper's survey indicates that those efforts have yet to curb Ulta's growing strength with these young consumers.

Another red flag for J.C. Penney

While LVMH might not want the intensifying competition, Sephora is just one of the luxury giant's 75 leading consumer brands, so it can easily offset the retailer's softness with the growth of its other businesses.

Yet Ulta's success raises a red flag for J.C. Penney, since Sephora is one of the only brands bringing shoppers -- especially younger ones -- back to its stores. J.C. Penney investors shouldn't jump to conclusions based on a single survey, but they should recognize Ulta's growth as yet another headwind for the struggling company.