Lululemon keeps stretching
Diversification pays off for Vancouver firm in strong quarter
TORONTO — Despite an influx of less expensive yoga leggings and sportswear from competing retailers, Lululemon executives remain confident in the appeal of their pricey exercise togs.
“As long as we deliver innovation across categories and across gender, we have tremendous pricing power,” Lululemon chief executive Laurent Potdevin told analysts Wednesday on a conference call to discuss fourth quarter and year-end results that significantly surpassed analysts’ estimates.
Shares jumped almost 11 per cent to close at $67.80 US on the Nasdaq stock exchange.
The Vancouver-based retailer, whose most popular offerings include $98 leggings and $118 hooded sweatshirts, has been focusing for two years on growing its men’s business and diversifying its women’s pant lines, and the efforts seem to have paid off.
The retailer posted comparable store sales in the double digits for women’s bottoms in the quarter ended Jan. 31, Potdevin told analysts, and sales in the men’s category surged, growing 24 per cent in sweats alone.
“We are only getting started in the men’s category,” the CEO said.
Lululemon reported earnings of $117.4 million US in the quarter, or 85 cents US per share, up six per cent from $110.9 million US (78 cents US) in the same period a year earlier. That beat analysts’ average estimates of 80 cents US, according to Thomson Reuters. Revenue rose about 17 per cent to $704.3 million US and same-store sales, including online sales, rose five per cent on a constant-dollar basis.
Online sales were up 30 per cent in the quarter and accounted for about 21 per cent of overall sales, a figure expected to reach 25 per cent by 2020.
Lululemon anticipates that by then it will have doubled annual revenue of $2.06 billion US through ongoing store openings and product diversification, including the development of more sport-specific “technical” clothing.
Executives believe the regular release of new, proprietary sportswear will help Lululemon fight rivals from Under Armour to Gap and Joe Fresh, who have lower-priced yoga pants and so-called “athleisure” wear, fitness-influenced fashions that cross over from workout wear to casual wear.
In addition to creating a “pant wall” to showcase its designs and products featuring a thicker version of its signature Luon fabric (dubbed ‘full-on’ Luon), the retailer has applied more hightech testing to its products at Whitespace, a product development lab in Vancouver that tests how products stand up to sweat and laundering.
It also developed a newer soft and light tights fabric, Nulu, for those who want to feel a “naked sensation” while they exercise.
Neil Saunders, CEO of the retail consulting firm Conl umino, applauded Lululemon’s online sales growth, but believes the retailer needs to make its stores more appealing to drive up business from loyal customers and attract new ones.
“This is especially so in light of a much more competitive marketplace in which players like Under Armour are rolling out more experiential stores,” he said.
“We do not anticipate the market for athleisure to slow down any time soon, (but) we do believe that it is now much more difficult to grow simply because there are so many players vying for share.”
In addition to product development, Lululemon’s executives have been focused on inventory management and improving its supply chain by reducing freight costs.
“We shouldn’t forget what a weak quarter it was for most other retailers,” Paul Lejuez, analyst for Citi, said in a note to clients.
“More importantly, inventory levels are leaner than expected and gross margin came in well better than consensus.”
Lululemon opened 61 stores in fiscal 2015, and now has 363 global stores — 41 stores in Canada, 188 in the U.S. and the remainder in Australia, Asia and Europe.
The company is anticipating a comparable store sales increase in the mid-single digits on a constant-dollar basis for fiscal 2016, and net revenue in the range of $2.29 billion US to $2.34 billion US. Diluted annual earnings per share are expected to be in the range of $2.05 to $2.15 US.