Lululemon Athletica, which last week reported a 60.2 percent hike in third quarter earnings, appears to be one of the few retailers to navigate this recession without resorting to pervasive markdowns.
After the financial collapse last fall, many Wall Street observers felt Lululemon would feel the brunt of the recession given its pricy goods. Jackets range from $99 to $128; pants, $74 to $168.
Not that the Vancouver-based retailer of yoga wear and other athletic apparel wasn't impacted. The 10 percent same-store sales gain in the third quarter came after three periods of declines. But it now expects earnings to rise for the year on healthy sales and full-price selling.
On its third quarter conference call, Christine Day, CEO, indicated that Lululemon ultimately benefited from a few key steps designed specifically to reduce markdown pressures amid the recession:
- A focus on securing space in high-quality factories to support a quick turn on goods. While costing more up front, the move reduced inventory on hand while enabling quicker turnaround. Items are now replenished in two weeks to 45 days;
- An emphasis on "more value" products with added technical functionality, colors and fabrics without increasing prices. Likewise expanded its organic cotton and natural fabric lines at competitive prices to provide a greater point of differentiation;
- Reducing prices of some key accessories to drive traffic and to solidify its position as the leading yoga retail and lifestyle destination. Its yoga mat was cut to $28 from $54;
- Increasing availability of items such as tops for layering to standard offerings at the lower end of its price range, $50 to $70.
Most of these moves hurt margins while driving sales in the first half. But gross margins in the third quarter improved to 49.9 percent from 48.1 percent with the aid of improved sourcing on fall merchandise and reduced markdowns.
"Our focus on sourcing and supply chain initiatives, as well as adding value for the guests have paid off with increased sales providing leverage on depreciation and occupancy, while supply chain initiatives improved our initial product margin," said Ms. Day.
Also helping is a continued strong response to the concept with its focus on healthy living. Grassroots efforts such as offering complimentary yoga classes is helping Lululemon further bond with local yoga and fitness enthusiasts. And strong demand for its core yoga collections as well as its new running collection is also driving the top line.
"Our focus on new colors and styles delivered weekly creates a scarcity model that provides an immediate guest purchase," said Ms. Day. "This focus, combined with an upbeat staff and store environment have proven over and over to be a winning formula."
Discussion Questions: What do you think of the many ways Lululemon added value during the downturn without resorting to promotions? Is there one that particularly stands out?