By Neil Saunders
Revenue growth of almost 26% allowed Lululemon to surpass the billion-dollar sales mark in its final quarter. Although this was aided by an additional week of trading, the contribution from underlying growth remains strong and marks Lululemon as one of the brightest stars in the retail sector. On the bottom line, net income rose by over 82%, partly supported by a healthy uptick in both gross and operating margins.
The sources of Lululemon’s ongoing success are numerous.
- It is expanding its shopper numbers as more consumers discover its brand and products. The pace of new customer acquisition has slowed over the past couple of years as Lululemon has matured and become a bigger business. However, we still see significant potential for future customer growth. Lululemon’s exposure is still nowhere as high as bigger brands. And it has pockets where it is “
underpotentialized,” including among men, older customers, and occasional fitness and wellness shoppers.
- Lululemon is selling more to its existing shoppers and is taking a greater share of their wallets. Part of this is due to expansion into nontraditional fitness categories such as business casual—a move that has been well received and superbly executed. Product extensions are usually fraught with risk, as they can easily dilute the focus and purpose of a brand. However, Lululemon has maintained its core emphasis on producing mindful products that have
greatdesign with superior functionality. Outside of this, in core fitness ranges, more exciting colors and designs, especially in menswear, have stimulated more frequent purchasing.
- Lululemon’s investments in stores and digital have helped drive revenue by better showcasing the whole offer and by making buying more convenient for shoppers. In particular, the expansion of BOPIS has been well received. Meanwhile, newer stores, such as the relocated and expanded outlet in Scottsdale’s Fashion Square, are more of a destination because of the wider assortment and the enhanced range of services like personalization.
A long period of strong growth often runs the risk of a sudden dampening as comparatives become tougher to match and as the drivers of uplift run out of steam. However, in Lululemon’s cases, we see more future upside than downside and do not expect growth to deteriorate to any significant degree. Part of this comes from strong loyalty to the brand, which will help Lululemon hold onto customers even as others try to imitate its success. Part also comes from future initiatives that the company can put into play.
Looking at the future, we are particularly excited about the loyalty scheme. In commercial terms, this is more of a membership program; consumers pay a subscription in return for several benefits. Not only does this potentially give Lululemon a new stream of revenue, but it also generates more customer data and gives the company a platform to push harder into areas such as classes, events, and wellness services. While the full raft of services will not come in the near-term, we believe Lululemon is putting in the groundwork to eventually make such moves.
Ultimately, all of Lululemon’s success and its future potential come down to a clear brand vision, which is flawlessly executed. This stands in marked contrast to many other retail operators, and it is the core reason for Lululemon’s enduring popularity and continued growth.
Neil Saunders is managing director of research firm GlobalData Retail.