Does Lululemon have to sweat inflation?
Lululemon said it is seeing increased input costs on raw materials, labor and particularly air freight, but is wary about raising prices to mitigate the impact on margins.
Management is planning modest price increases for only about 10 percent of Lululemon’s assortment this year. Some prices were raised in the first quarter with no signs of customer resistance and more are planned.
“We are implementing some select price increases and have not seen any negative impact to our sales volume as a result,” said Calvin McDonald, CEO, last week on Lululemon’s first-quarter conference call.
“However,” he added, “unlike many in the industry, we do not use promotional pricing as a lever to drive top-line sales. Therefore, we are very intentional with our pricing strategies, and we monitor guest response accordingly. That said, I remain cautious around increasing prices in this period of uncertainty, and we will continue to monitor and maintain a measured approach toward this strategy.”
Pricing decisions take into account the value of the brand’s innovation and the competitive landscape.
Many chains have expanded activewear assortments in recent years. Lululemon’s prices are slightly higher than peer competitors, Nike and Athleta, and more than triple the prices at Target and Walmart.
Lululemon’s first quarter results arrived easily ahead of company expectations, prompting the retailer to lift full-year guidance. Revenues jumped 32 percent year over year and 27 percent on a three-year compound annual growth rate (CAGR) basis, with earnings improving at a similar rate.
The earnings gains came despite a decline in product margins of 370 basis points year over year due to investments in air freight to offset supply chain delays. Markdowns were approximately flat with last year.
Inventories were up 74 percent year over year, also reflecting air freight costs as well as in-transit inventory and lean year-ago inventory levels. On a three-year CAGR basis, inventory unit growth increased 36 percent, more aligned with expected growth in coming quarters.
Recent quarterly reports from Nordstrom, Ralph Lauren, Canada Goose, Chanel and Burberry have indicated that higher income customers aren’t yet changing their purchasing behaviors due to inflationary pressures to the degree of lower income households.
- Lululemon Athletica Inc. Announces First Quarter Fiscal 2022 – Lululemon
- Lululemon Athletica (LULU) Q1 2022 Earnings Call Transcript – The Motley Fool
- Analyst on Lululemon raising prices amid rising inflation: ‘Clearly they have pricing power’ – Yahoo Finance
- U.S. luxury retailers lean on affluent customers to avoid inflation pain – Reuters
DISCUSSION QUESTIONS: Are inflationary pressures more or less of a risk for Lululemon than most other retailers? What advice would you have for Lululemon around pricing amid the inflationary and potentially more promotional marketplace in coming quarters?