Lululemon needs “to work harder”

Lululemon’s third quarter sales performance – measured on a total basis – was solid with total company revenues up by 14 per cent.

This was mostly driven by the addition of 52 new stores, with the extra 142,000 sqft of selling space making a good contribution to the top line numbers.

However, more worryingly the growth contribution from existing physical stores was nonexistent, and while the contribution from direct sales looks reasonable the growth rate is somewhat down on previous quarters.

As with other retailers, the strong dollar is partly to blame for this lacklustre outcome; indeed, on a constant dollar basis total comparable sales were up by six per cent, with same store physical growth also up by six per cent. That noted, even with exchange rate fluctuations removed, growth is noticeably slower which, points to a much wider set of issues.

Foremost among these is the rise in competition from both specialist and generalist players. While Lululemon has a following of dedicated fans it also relies on more occasional purchases from those who are somewhat less loyal to the brand, and it is here that the company has lost traction over the course of this quarter. Although arguably Lululemon still has a distinct and well positioned brand, there is no doubt that a more crowded playing field has made growth much harder to come by.

The impact of the more competitive arena is further exacerbated by the company’s own push into direct selling. While this has been a great success, with online now accounting for 18.6 per cent of all revenue, it has also cannibalised some trade from stores and, with higher fulfilment costs, has been slightly margin dilutive.

The problem with all of these dynamics is evident in the bottom line performance. Notably, Lululemon’s net income for the quarter fell by a fairly sharp 12.1 per cent and operating income was down by a shade under 16 per cent. Understandably, some of this can be attributed to the higher investment costs as new space opens, but most of it is down to the deterioration in the productivity of the existing operation.

One of the solutions to the current squeeze is arguably greater product innovation which would stimulate customers into buying new product and allow Lululemon to ease up prices. However, while some movement on this front is apparent, Lululemon has lost much of its edge, and in comparison to a player like Under Armour its product development looks positively glacial.

In light of the relative lack of innovation it is discouraging to see the recent attempt to hike some prices, which is something the market will not likely bear given current competitive conditions. It also had the effect of upsetting loyal customers who saw little justification for the increases and therefore viewed them as being unreasonable. Given the current struggle for growth, alienating core consumers is arguably the last thing that Lululemon should be doing.


Despite the challenges, the one area of opportunity is the push into more embryonic areas like mens and teens. However, while Lululemon has made some good progress, the brand still has a somewhat limited appeal to many of these constituencies, mainly because it is strongly associated with its heritage of female fitness. Certainly, it is proving much more difficult for Lululemon to move into mens than it is for Under Armour to move into womens.

Despite the challenges, the tailwinds provided by continued interest in athletics and fitness – which shows no signs of slowing down – will likely to help cushion Lululemon’s problems. However, the company now needs to work much harder if it is to keep in good shape in what is now a much more competitive market.

Neil Saunders is CEO of Conlumino.

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