LuLaRoe Aims to Right-Size Business As Founders Seek Return to Growth
LOS ANGELES — LuLaRoe chief executive and cofounder Mark Stidham called the recent spate of lawsuits against the company commotion, and is sticking to the story the Corona, Calif.-based firm is in the midst of a correction that should set the business back on track to growth beginning next year.
The direct sales business, best known for its leggings, makes product for mostly women, in addition to some for men and kids, in generous cuts and bright prints. It enlists sellers it calls retailers, who buy product from the company to then market to the end consumer. In the five years since its founding, it has seen explosive growth: $3 million in wholesale sales in 2013 (when the business began in May of that year),
$9.6 million in 2014, $74 million in 2015,
$1.3 billion in 2016 and $1.6 billion in 2017. The companywide employee headcount stands at 1,080 people with product made across 22 factories in eight countries. Its retailer fleet totals 50,000.
This year is the first it's projecting a contraction in the business with wholesale estimates in the range of $800 million to $1 billion, which Mark Stidham, who founded the company with his wife and president DeAnne, attributed to back-end complications, largely resulting from growing pains. The company couched the estimate, adding the business has consistently exceeded its own expectations on sales performance.
“Last year, we finally developed the technology that would allow us to track sellthrough,” Mark Stidham said. “What I found when we did that was that they [retailers] were not selling all of the product they were buying from us and so we've had a correction in realigning with that. That correction created fear so a lot of people left because it wasn't as easy as it used to be and so the business has consolidated. And that's the bad news is that our sales are down, but the really good news is that our retailers now sell more than twice as much.”
The ceo brushed off the idea the business' contraction is at all linked to negative press in the past year around complaints about the business from some of its consultants and end customers wearing the product. LuLaRoe has an F rating from the Better Business Bureau with 404 complaints filed against it in the past three years, ranging from long lead times on refunds to defective product and some sellers being charged sales tax in states where taxes are not levied on apparel.
“We are in constant contact with the BBB and continue to see improvements in our rating,” the company said in response to its grade.
It went on to add much of the complaints stem from poor interactions between retailers and the consumers buying from those consultants, which LuLaRoe said it can only redirect those customers back to the consultants to correct the issues.
The complaint that's garnered the most attention was a $1 billion class action lawsuit filed in U.S. District Court in the Central District of California in October of last year by three former consultants alleging the business of operating a pyramid scheme, false advertising and unfair and deceptive practices. The complaint alleged the three consultants were continuously subjected to a “buy more, sell more” tag line from the company and were “duped” into believing the company's “endless chain scheme that only profited a few and only made payments to consultants based on how much product those consultants and their recruits purchased on a regular basis,” the complaint said.
Attorneys for LuLaRoe asked a judge to send the matter to arbitration, citing contracts signed by the consultants requiring disputes first go to mediation and then, if unsuccessful, settlement by arbitration. The matter was closed in January of this year after the plaintiffs dismissed the case without prejudice, meaning a similar complaint could be filed at another time.
Additional lawsuits filed late last year alleging similar allegations in addition to issues with the company's buyback policy were also dismissed without prejudice. A contract dispute, again stemming from the buyback policy, was filed in October and was stayed — or essentially placed on temporary hold — in April of this year pending the outcome of arbitration.
DeAnne Stidham characterized the backlash as being driven by disgruntled sellers unable to meet the demands the business model requires.
“I think the ones that are negative is because they went back into fear mode and they didn't really do the homework and listen and pay attention to their business and they want to not own up to what they should or could have done,” she said.
Mark Stidham called the lawsuits and negative press “commotion” that he said has mostly died down. As he told it, the business for the most part has shied away from press because of a desire to focus on steadying operations to accommodate the rapid growth.
“When we started, we were on this rocket ship,” he said. “We had a lot of people [in the media] that wanted to come talk to us and tell our story and we kind of kept that at arm's length because I knew how ragged the backend was. I knew that we had problems. I knew that we were having growth challenges. We weren't getting orders out on time. They weren't accurate when they went out. There were things that we were in the process of fixing.”
Proper back-end processes have been a learning curve for the couple. Mark Stidham, a serial entrepreneur who most recently owned a concrete contracting business, joined DeAnne Stidham in her budding business back in 2013. DeAnne has dabbled in various businesses herself, including operating two nail salons, leading a children's performing group and selling children's dresses at pop-up home parties — all largely driven by a desire to support herself and her family. She told the story of how her family fell on hard times at one point, having a home fall into foreclosure.
“I was a connoisseur shopping at Big Lots and 99 Cents Only Stores and loved that I could shop on a budget, but sometimes I just wanted to run into Vons and buy what I wanted when I wanted it, so
I'm very sensitive to understanding the American family that wants more out of their lives because I've been there — we've been there,” she said.
The majority of LuLaRoe consultants make less than $5,000 a month, according to Mark Stidham. Top retailers, he said, sell close to $500,000 a month. The start-up fee is about $5,000, which the company began charging around 2014 when they stopped providing product to consultants on consignment.
Mark Stidham estimated the business could be back to “well over $1 billion and headed toward the $2 billion mark” around 2020. He also confirmed the business is profitable and has been since its start with the Stidhams bootstrapping the startup capital and remaining sole owners.
Denim is being considered for a launch in the first quarter, a big deal for a company that's predominantly been focused on knitwear. There's also shoes and accessories to consider, DeAnne Stidham added.
“There's so much of the women's market that we haven't tapped yet,” Mark Stidham said. “We're really an unknown brand. There's been some commotion around it lately, but I think if you went and asked 100 women in L.A. if they know about LuLaRoe, you probably wouldn't find many that do.”
A spokeswoman said the company's strategy has been focused on building the brand in middle America rather than areas traditionally viewed as primary markets for fashion. It helps drive demand, the spokeswoman added, with merchandise produced in limited quantities of no more than 5,000 units per style.
Mark Stidham also pointed to men's and kids as businesses that have runways to grow with LuLaRoe only “dabbling” in both areas currently. Creating separate lines with varying price points is another route the company would consider with something on the higher end for professional women, a basics line and then a more price-conscious line, he said.
Ultimately, as it relates to any outstanding legal matters or other complaints, Mark Stidham said he's confident about the eventual outcome.
“These lawsuits have lost their steam,” he said. “They're dragging their feet. We've answered everything we need to answer. The courts move slow; I'm not afraid of any of them because I know the facts. I'm in full possession of all the facts.” ■
The firm’s founders said technology and category expansion should help the business get back to $1 billion in wholesale sales by 2020.