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Two Surprising Factors Are Driving Growth For Lululemon

imgres7/13/2015 @ 1:44PM 929 views

Trefis Team  Contributor

Lululemon Athletica reported a solid set of quarterly results when it announced its earnings for the first quarter of fiscal 2015 earlier this month. The retailer reported a revenue increase of 10%(a year-on-year comparison) to $423.5 million in the quarter, while also more than doubling its EPS to 34 cents from last year’s 13 cents. The results were particularly impressive given that the company has been in a transitional phase as it expands into new product categories such as swimwear and new geographies such as Europe and Asia. The surprising thing then is that the company’s growth was driven by two factors that haven’t previously been considered strong points for the company – its direct to consumer business and its menswear business. Below, we take a look at the factors driving growth in each of these segments.

We have a $57 estimate for Lululemon, which is about 15% below the current market price.

Online Sales Growth

An increasingly large percentage of purchases in the retail market are now being made through web browser applications and mobile applications. This makes it extremely important for every retailer to be adept at selling its products through those channels. Lululemon is showing that it can do just that: in its most recent quarter, the company increased its sales through the direct to consumer channel by 27% to $83.6 million. The channel now contributes around 20% to the total revenue of the company.
Contrast this to just four years ago, when the company only earned 7% of its revenue through online sales, and it is clear that the company has come a long way when it comes to engaging customers online. This trend is a positive one for the company as the direct to consumer channel has higher gross margins. When a company sells products through a retailer, it does so at wholesale prices, which reduces the average transaction price. Obtaining control over the sales process allows the company greater price setting flexibility, which they generally use to increase average transaction prices and thus post higher gross margins. Additionally, there are operational benefits to the e-commerce platform which result in cost savings. The company can move inventory faster as it has fewer steps in the supply chain, given it just has to move products from distribution centers directly to the customer.

Men’s Business

Since the company’s launch in 1998, its products have been most popular with women between the ages of 18 and 44. However, in the last two quarters, the retailer’s men’s business began to gain momentum and posted 18% year-over-year growth. The men’s product has grown to close to 20% of total store assortment.

The main product that drove the segment’s growth during the quarter was the $128 per pair, new, comfortable, ABC pants. ABC, which stands for Anti-Ball-Crushing, is a product that lives up to the company’s image of providing fabric solutions that are versatile and functional, but also chic. It is a new kind of yoga pant that, like the $98 yoga pants it sells for women, could prove to be incredibly popular with millennials. The pants have attracted much attention and seem to be generating the sort of positive buzz the company needed after a string of PR disasters in 2013. Men still represent a new, untapped market for Lululemon and since many are still unfamiliar with the brand, this gives the company plenty of opportunity to redefine itself. The success of the ABC pants gives at least some evidence that the company can meet their demand as successfully as that of women, and the $128 price tag will help the company raise its margins as an increasing penetration of the pants in the sales mix will push the average unit price of products sold by the company higher.

In November 2014, the company also opened its men’s only store in New York. The store is staffed with tailors who can customize fit and lining, something that is quite unique among makers of technical fabrics. The retailer believes that the market size for its men’s products is around $1 billion, but did not divulge any target date by which it plans to achieve that revenue figure. In the earnings call, Lululemon’s CEO Laurent Potdevin also indicated that one of the company’s near term targets was increasing the size of its stores in order to accommodate a greater selection of men’s clothing. This could be a signal that more men’s products are on the horizon.
One example given by Potdevin was the remodeling of a location in Vancouver. The store size was increased by 50%, which led to a 50% overall increase in same store sales and a 90% increase in men’s sales in a span of just six months. The company expects a similar boost in sales from other store remodels in the future. However, there is a caveat here. These investments could weigh on the profits in the near term; but, if the company’s track record with the women’s business is anything to go by, they should come off well in the long term.

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