By Kevin Wathey
While other players in the sports and athleisure market struggle, Lululemon continues to go from strength to strength. The 14% uplift in total sales is impressive, especially as it was delivered against the backdrop of exiting ivivva stores. The 8% increase in comparables sales is equally robust and underlines the fact that Lululemon is still attracting new customers and is getting existing shoppers to spend more at both its stores and online.
The slight downside comes from the bottom line, where net income dipped by almost 14%. However, this was a function of asset impairments and restructuring costs associated with the ivivva closedown, rather than symptomatic of any fundamental issues with the business. Excluding the exceptional $21 million of fees, net income rose by a healthy 17% over the prior year.
The company has long understood the power of creating a sense of community. Initiatives like the Mindfulosophy meditation lounge in New York’s Fifth Avenue store send a message that shops are not just about selling but also about educating, informing and assisting customers.
Exceptional items notwithstanding, the strength of Lululemon’s bottom line is mostly thanks to its ability to resist the temptation of excessive discounting – even in a market that has become steadily more promotional. In our view, this is made possible by the fact that Lululemon, unlike so many of its rivals, has a line-up of products that people want and for which they are prepared to pay full price. Constant innovation and a laser-like focus on functionality and quality are central to this.
Complementing the product proposition are Lululemon’s efforts to foster loyalty. The company has long understood the power of creating a sense of community, and we are encouraged to see it extending its efforts in this area. Initiatives like the Mindfulosophy meditation lounge in New York’s Fifth Avenue store, send a message that shops are not just about selling but also about educating, informing and assisting customers to improve their wellbeing and mindfulness. Although we do not see such large-scale initiatives being rolled out across the entire estate, we believe there is now a greater focus on using stores for community purposes.
Even with these efforts, stores remain the weaker side of the business with their 2% increase in comparable sales overshadowed by the 26% uplift in direct revenue. Although we maintain our view that growth in shops could be somewhat higher, we also believe that Lululemon is moving towards a seamless omnichannel model and is now using stores much more effectively to support online growth. In this regard, it is less relevant to dissect the two numbers than it was a year or so ago.
The question as we move into the holiday quarter and beyond is whether Lululemon can maintain its momentum. We believe that it can. Its continued outperformance will be supported by a number of factors.
Foremost among these is new customer acquisition. The marketing campaigns Lululemon has run this year, including the iconic This is Yoga advertising, have helped the brand reach new audiences; in our view, there is the potential to double down on these efforts over the next 12 months. Growing the customer base also includes the success Lululemon is having in menswear. Last year we saw a spike in the number of new male shoppers around the holiday period and into the new year. This was a function of both more men coming into stores to buy gifts, and more men being given Lululemon products as presents. We expect this trend to repeat itself this year.
International growth and new product innovation will also fuel sales. The former is particularly helpful in driving revenue, and we remain excited about Lululemon’s prospects in both Asia and Europe. The latter gives the numbers a softer boost but also plays a critical role in keeping existing shoppers coming back for more. On the product side, we feel that Lululemon has some potentially significant wins ahead, especially in categories like footwear where it has just launched its first range of sneakers in collaboration with California-based Athletic Propulsion Labs.
Overall, we remain optimistic about Lululemon. It is true that the company has had a good run of growth and it is also the case that overall market conditions will continue to be challenging. However, Lululemon’s careful control of its brand, along with its efforts to position itself as a company that helps people achieve their lifestyle ambitions, will help it to speed through prevailing negative headwinds.
Kevin Wathey is a consultant at GlobalData Retail.