Does Lululemon have to sweat inflation?

Discussion
Photo: Lululemon
Jun 06, 2022

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.

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?

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"The company needs to be very cautious and intentional about where it raises retail prices and where it holds the line. "

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18 Comments on "Does Lululemon have to sweat inflation?"


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Mark Ryski
BrainTrust

As a premium, leading brand Lululemon is an enviable position of having customers who are less prone to inflationary pressure. But like all brands/retailers, Lululemon must continue to be vigilant about pricing and be aware of the promotional climate. I’d say that Lululemon’s playbook is solid and performing well even in these challenging times.

Neil Saunders
BrainTrust

Inflation is a risk for all retailers. However Lululemon is in a better position to manage the impact. For one, it generally maintains gross margin levels as it rarely discounts. For another, its customers are willing to pay fairly high prices for products, so there is scope to increase some prices moderately if needed. And on top of all of this, Lululemon has good opportunities to expand its customer base and sell more to existing shoppers as it diversifies into new categories, both of which help to drive both the top and bottom lines.

Bob Amster
BrainTrust

One would think that for consumers that were willing to spend more for Lululemon’s activewear, inflation will not be a significant deterrent. For aspirational shoppers, it might well be.

Richard Hernandez
BrainTrust
Richard Hernandez
Merchant Director
5 months 24 days ago

Lululemon customers know they are going to pay for the quality of the product already. Lululemon’s average item price is generally above that of other sportswear/athleisure lines and has been above most retailers for a long time now. If Lululemon is smart, it will pass along any cost increases in small increments so they are not noticeable to customers.

Shep Hyken
BrainTrust

As inflation is impacting most retailers, premium brands like Lululemon have a customer base that is less sensitive to price, hence less sensitive to inflation. That said, it is imperative that they continue their value proposition, which combines high quality merchandise with excellent customer service and experience. This is what “brought them to the dance,” and what their customers expect. A mistake in the value proposition will send customers to Lulu’s competitors.

Phil Rubin
BrainTrust

Key words: “unlike many in the industry, we do not use promotional pricing as a lever to drive top-line sales.” That discipline, along with its strong brand and clear customer focus, makes Lululemon confident to be able to take “modest” price increases and that discipline will allow it to sustain its loyal customer base and maintain its growth and profitability. If yesterday was any indication – where I saw three 20-somethings with the same Lululemon item (an obvious best seller for them) – they are continuing on the right path. And a significantly better one than the Macy’s, Kohl’s and Gaps of the world. It’s refreshing to see smart retail leadership and management.

Dick Seesel
BrainTrust

As a premium active brand, Lululemon can continue to avoid the promotional free-for-all but even its higher-end customers are feeling the pinch of higher gas and food prices. The company needs to be very cautious and intentional about where it raises retail prices and where it holds the line.

Frankly, the key for Lululemon to avoid gross margin erosion is not by raising its prices arbitrarily, but by managing its inventory levels more effectively. (The same can be said for many other retailers in the news recently.) Even the three year CAGR of 36 percent is concerning, given some slippage in the total activewear business as the “work/play from home” trend softens.

David Spear
BrainTrust

Lululemon is a premium brand and has enough cachet with consumers that small price increases with select items won’t translate into lost sales. That said, inflation is a real and present threat to all retailers and Lululemon’s senior leadership must remain in high listening mode so as not to miss a negative swing in their brand consumer sentiment.

Jeff Sward
BrainTrust

Of course Lululemon has to worry about inflation. Maybe not as much as some brands, but no brand is immune. Their first quarter sales increase is a staggering affirmation of the love that Lululemon customers have for this brand. The margin hit reflects the inflationary pressure in the supply chain, but so far inflation doesn’t have their customers slamming on the brakes.

Lisa Goller
BrainTrust

Higher margins and an upscale audience cushion Lululemon from inflation more than other retailers. At least for now.

As a quality brand targeting shoppers with more disposable income, Lululemon faces less pressure to slash its premium pricing. Lululemon’s resale program will also expand its appeal to new shoppers who seek affordable quality.

Adaptng to both premium and value shoppers is smart as retail bifurcation becomes more apparent.

Liza Amlani
BrainTrust

As a Lululemon customer, I will pay a few extra dollars for their products. This is the beauty of having a loyal following – as long as Lululemon is transparent in why they are increasing some of their pricing, their customers will not question price hikes and will pay for what they want.

Gary Sankary
BrainTrust

Lululemon is a brand that I believe is particularly susceptible to inflation as some of their customers will abandon premium brands, particularly their aspirational segments. I think their game plan is solid, but they need to be vigilant about monitoring demand and have the flexibility to react if needed.

Patricia Vekich Waldron
Staff

Lululemon has a strong reputation as a premium brand with a loyal customer base as well as many aspirational customers. Incremental price increases and continuation of desirable merchandise will be a good strategy to continue their market position.

Brandon Rael
BrainTrust

There are several sectors of the retail industry that are relatively immune to global economic downturns and inflationary periods. These include the luxury, dollar store, and off price retail sectors. Lululemon has evolved into a luxury brand, now uniquely positioned at the intersection of lifestyle, fitness, fashion, and aspirational luxury.

Lululemon has an extremely loyal following and has become increasingly popular with teen and pre-teen-aged customers. The brand has a unique opportunity to innovate, diversify its product assortments, drive new service offerings, and extend brand awareness via social channels and cross-brand collaborations. Despite all the economic headwinds, Lululemon is well-positioned for growth and profitability.

Liz Crawford
BrainTrust

Nope. Lululemon floats above these concerns. I see the Maseratis parked outside the shop … I don’t see inflation daunting anyone there.

Ananda Chakravarty
BrainTrust

Inflation presents a lower level of risk for Lululemon than other retailers-precisely because its constituency is more affluent, resulting in more inelasticity for most products they sell. Lululemon has the ability to raise prices as well, and the strategy it’s taking is the best, with selective price increases.
Staying away from the promotional herd suits (no pun intended) Lululemon and keeps their brand in sync with high quality luxury athleisurewear.

Oliver Guy
BrainTrust

It could be interesting to see if Lululemon consider launching a more cost-effective sub-brand to address some of these concerns. These are tricky approaches as they risk devaluing or cannibalising the core brand — however, others have done this. Lululemon’s core market has been attacked by so many competitors over the past few years that it will be an interesting area to watch.

Anil Patel
BrainTrust

Lululemon’s target audience falls under the affluent middle class and higher income customers. Being a well-established athletic apparel retailer they can push through the price increase without any worry. Raising prices can help them to deal with the persistently increasing input costs. Lululemon has a strong base of loyal customers, this gives them an edge over other market players. I think Lululemon should also give a thought to fostering sustainability and reducing the carbon footprint. Being environmentally conscious can also further attract other potential customers.

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Braintrust
"The company needs to be very cautious and intentional about where it raises retail prices and where it holds the line. "

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