Lululemon sales come down with a bump
After ending its last fiscal year with a flourish, Lululemon sales came down to earth with a bit of a bump during the first quarter of this year.
While total sales continue to advance, mainly thanks to the addition of new stores, the growth rate of 5 per cent is anemic compared to the double-digit increases Lululemon has traditionally posted.
Comparable sales also took a turn for the worse, dropping by 1 per cent over the prior year; with comparable sales in stores dipping by 2 per cent, and direct comparable sales coming in flat.
To be fair, much of this is down to tougher prior year comparatives. It was never feasible for Lululemon to continue posting stellar increases ad infinitum, especially against the backdrop of a crowded and competitive market. When set in this context, the numbers are not so bad and have topped previously issued guidance.
Over recent months, there has been widespread concern that Lululemon would be affected by the slowdown in the athleisure space. Although this slowdown is still running its course, we are encouraged that it is not impacting Lululemon to a major extent. This is evident in the trends across the quarter which saw growth strengthen towards the end of the period and into the early part of quarter two. In essence, we feel that Lululemon is holding its own.
A strong menswear offering with some high-quality key pieces, continued innovation in women’s collections, and effective marketing, are all helping Lululemon maintain momentum.
All of these initiatives are capable of driving further growth in the year ahead.
The trouble with Ivivva
The slight disappointment came on the bottom line where, despite good gross margin gains, net income plunged by 31 per cent. Most, although not all, of this, was down to a $12 million impairment charge related to the restructuring of the Ivivva operation – the part of Lululemon’s business that offers fitness wear to younger girls, typically aged between eight and 12.
As part of this restructuring, Lululemon will close around 40 to 55 stand-alone Ivivva stores. Around half of these will be converted to Lululemon stores – something that will help fuel growth of the core brand. After this is complete, Ivivva will operate as a digital brand with a handful of outlets in select locations. Overall, the restructuring will cost $50 to $60 million and will be largely complete by the end of the third quarter.
We are not particularly surprised by the decision to streamline Ivivva. While there is some demand for athletic wear for younger girls, the level and frequency of that demand is insufficient to support a network of expensive stores. This has likely become even more of an issue over the past year as generalists have piled into the market – affording price sensitive and brand disloyal younger consumers more opportunity to shop around. That said, Ivivva is not without potential – but that potential is more optimally reached via e-commerce.
Although restructuring costs will drag down future earnings, the prospect for sales is far rosier. Even though the stiff prior year comparatives remain, we anticipate comparable sales will swing back into positive territory – although they will only rise by low single digits. At total level, sales will be aided by chain expansion, with return on investment aided by a more flexible approach to growth, including from smaller local stores.
Overall, the outlook for Lululemon remains solid.
- Neil Saunders is MD of GlobalData Retail.