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Is Lululemon inflation proof?
Lululemon raised its outlook for the year after reporting second-quarter results that came in well above expectations, with same-store sales racing ahead 23 percent. The stellar performance came despite concerns over promotions across the apparel space and a slowdown in the athleisure category.
On an analyst call, CEO Calvin McDonald noted that traffic was up over 30 percent at stores and over 40 percent online. “Importantly, we are not creating this traffic through markdowns or price promotions,” he said. “Lululemon remains predominantly a full-price business, and we have not changed our promotional cadence or markdown strategy and we have no plans to do so.”
He cited a litany of reasons for Lululemon’s continued strength, including: product innovation that is resonating with existing customers and reaching new ones; successful category expansion into golf, tennis and hike as well as footwear; community activations; and its DTC (direct-to-consumer) model.
“Our own channels, both brick-and-mortar and digital, allow us to connect directly with our guests, foster deeper relationships and engage with them in many ways beyond just a purchase transaction,” Mr. McDonald said.
Competitor Athleta, owned by Gap, experienced an eight percent decline in comps in the second quarter. On Gap’s recent analyst call, Katrina O’Connell, EVP and CFO, said Athleta had been impacted by a “modest slowdown” in women’s athleisure, citing NPD data, as demand has “shifted from athleisure toward work and occasion in the short term.”
Jefferies’ Randal Konik last week downgraded Lululemon to “sell” on increasing doubts the chain will be able to reach five-year goals, set in April 2022, to double sales by 2026, driven by doubling men’s and digital sales and quadrupling international revenues.
In a note, the analyst wrote that recent downtrends in China may hinder international growth, that the men’s push faces challenges due to the brand’s strong association with yoga and women, and that entry into new categories, including footwear, may lead to reduced management focus on leggings and other core offerings. Her also cited the increasingly-pressured apparel category.
Mr. Konik wrote: “Inventories are bloated across retail (LULU included), promos are rising industry-wide, FX is not helping, and inflation isn’t going away.”
- lululemon athletica inc. Announces Second Quarter Fiscal 2022 Results – Lululemon
- lululemon Announces Five-Year Growth Plan to Double Revenue by 2026 to $12.5 Billion – Lululemon
- Lululemon Athletica (LULU) Q2 2022 Earnings Call Transcript – The Motley Fool
- It’s not just inflation. People aren’t visiting clothing stores like they used to because they’re sick of loungewear. – MarketWatch
- Gap (GPS) Q2 2022 Earnings Call Transcript – The Motley Fool
- Jefferies Downgrades Lululemon (LULU) Stock to ‘Sell’ – InvestorPlace
Discussion Questions
DISCUSSION QUESTIONS: What’s driving the recent outperformance by Lululemon? Is it sustainable amid the broader inflationary pressures and increasingly promotional apparel space?
Poll
Loading …BrainTrust
Dave Bruno
Director, Retail Market Insights, Aptos
Brandon Rael
Strategy & Operations Transformation Leader
What’s driving Lululemon’s performance is what has always driven it – an extremely loyal following. Their customers have remained true to the brand because the brand has remained true to them. Every business is feeling some impact from inflation, and Lululemon is no different. However Lululemon is in a far better position to manage through this period in large part due to the unique and powerful relationship the brand has with their customers.
I don’t know that there are actually any “inflation-proof” retailers, but Lululemon certainly may be inflation-resistant, at minimum. Their consumers’ value perception is extremely high and, for the most part (one very high-profile failure being a notable exception, of course), they have continued to deliver against those perceptions. They target consumers that tend to have higher discretionary incomes, even in inflationary times, they deliver great products and they offer experiences aligned with their target customers’ lifestyles. All of these factors make Lululemon resilient and able to weather many market conditions. Time will tell, however, if the overall challenges in athleisure and apparel will eventually catch up to them. I suspect some tougher times may be in the offing, but hope for the best for them.
Lululemon is where every retailer dreams of being: No-need-to-discount Land. They are successfully adding channels and branching out into new sports and market segments. The term “athleisure” might be hard to pronounce, but it’s a niche that Lululemon owns, at least for women. There is a huge market for women who want to wear Lululemon while doing yoga or at least thinking about doing yoga some day. Inflation is little threat to a company that dominates its category, and Lululemon is thriving at that.
Core Lululemon shoppers are less susceptible to inflation because they have higher incomes and higher levels of savings. However even those with less robust incomes are continuing to prioritize Lululemon. This is revealing as it suggests that there is something of a flight-to-quality mentality where, despite Lululemon’s relatively high price points, the long-lasting and quality nature of the apparel convinces consumers it is an investment worth making. Of course, Lululemon shoppers have been trained to pay full price as the company rarely resorts to discounting, which is also very helpful.
Lululemon is a premium product. The price points are typically higher than average. There are several reasons for this. First is the quality of the product. Nobody can argue with the higher quality and longer lasting merchandise. There is a premium to be paid for that, and people are happy to do so. Second is the experience. You won’t hear many people complaining about customer service and experience when they do business with Lululemon. With the higher quality and cost comes the experience that customers expect. Add these together and you have an edge on inflation. Quality merchandise and an amazing experience doesn’t make price (even in times of high inflation) unimportant, but it does make it less relevant.
As the market splits high and low, Lululemon is safe, as it has earned the loyalty of upscale shoppers willing to pay full price. The recent addition of resale items makes its offerings accessible to even more shoppers.
Its enviable brand power comes from quality products, exceptional service and a vibrant community. Nailing the fundamentals cushions Lululemon from an economic downturn.
Turns out product + performance is an essential equation in delivering on a brand promise. And when that brand promise is consistently delivered on over the years (decades) it builds a formidable moat. But even a formidable moat does not explain Lululemon’s current amazing results. That is love and devotion. Adoration. All the macroeconomic metrics would suggest that it would be perfectly understandable for Lulu’s business to be going through some softening right now. And yet it’s experiencing remarkable growth. That kind of brand authenticity is rare indeed.
Certain brands — Lululemon, Nike, Starbucks — are sticky. They become part of their customers’ lives. Their continued success suggests that expansion is a winning strategy.
Lululemon has evolved and transformed into a luxury brand in a few short years. The cult of Lululemon has extended to the teenage and pre-teen customer segments. As a father to a middle school girl, we have spent quite a bit of time shopping in the Lululemon showrooms, and the outfits are the standard uniform for teenagers.
Not only is Lululemon inflation-proof, you hardly ever see any discounting in their stores. Lululemon has joined the ranks of Apple, Tiffany, and other luxury-based brands, whose mission statement, sense of community, and brand equity have extended beyond the product.
It’s core business seems inflation-resistant, yes, but I have some reservations about Lululemon’s promised growth trajectory. It has certainly earned brand loyalty among its core customers, and the product quality is evident. My question is, how many more luxury athleisure customers are out there?
Its strategy to sell garments for more types of sports will broaden its base, but likely dilute its premium position also. There are many places to buy a quality golf shirt or tennis shorts, and that means competing harder for that share of the sports wallet.
Aligning selling efforts towards the identified “ideal customer profile” is a primacy. Lululemon is well-versed with its target audience and delivers excellent products and services. As a result, amid the soaring inflation when almost every brand is struggling to stay afloat, Lululemon has seized an above-par performance. It’s highly crucial to establish a key differentiation, in order to sustain in the market. I believe retailers can derive concrete results by following Lululemon’s footsteps.