Canada: Why Lululemon has stayed sweet


Discounter Target Corp. sells activewear. So does the K-mart division of Sears Holdings Inc. So do specialty apparel marketers Under Armour and Nike Inc. Even Beyoncé has an activewear line.

With almost every general merchandiser and specialized apparel marketer selling activewear, Vancouver-based Lululemon Athletic Inc. should by now have been left in the dust. That is, after all, so often the fate of pioneers. It’s been a long 18 years since Lululemon founder Dennis “Chip” Wilson created the “athleisure” niche with the North Vancouver native’s first store, in 1998.


Yet Lululemon remains the dominant brand in premium activewear. And it looks set to achieve its ambitious goal of roughly doubling sales, to about $4 billion (U.S.), in just five years.

Despite many high-profile setbacks, Lululemon is well on the way to establishing itself as a global brand. The company has about 360 stores in eight countries on four continents, including its first two outlets in China, which opened this month.

Read Also: Dollarama, Amazon ‘forces to be reckoned with‘ in 2017

Apparel is a slow-growth industry. But revenues at Lululemon were up 17 per cent last year, and profits increased 11 per cent.

Among stock-market darlings, Lululemon has been among the most volatile of stocks. Since the firm went public, in 2007, Lululemon shares have repeatedly soared and slumped, depending on investors’ regard for the staying power of the company’s core yoga-togs franchise.

But activewear, including Lululemon’s premium-priced offerings, looks here to stay.

Lululemon stock has gained 32.2 per cent in the past year, twice the increase in the Dow Jones Industrial Average, which is up 16 per cent. Lululemon now sports an eye-popping market cap of $8.9 billion.
For perspective, that’s equal to the shareholder value of the much larger Gap Inc., with revenues of almost $16 billion to Lululemon’s 2015 sales of just $2.1 billion.

Apparel marketing is a treacherous business. Each of Gap, Abercrombie & Fitch Co. and American Apparel Inc. were once on top of the world. Gap was so embedded in the popular culture in the 1990s that it was parodied in Saturday Night Live sketches.

But Gap is now something of a zombie. It’s still around, of course, but no longer relevant. The firm has not been able to recover from over-expansion, and the loss of a once infallible touch in knowing what fabrics and designs its customers would want a year before its clients began clamouring for them.

That’s an obvious danger for Lululemon, whose current good fortune is hardly assured, given the checkered history of earlier market leaders.

Lululemon could become a fashion victim, committed to the only offerings it has ever known — yoga and fitness gear. There’s likely no place for denim in Lululemon’s future. That’s a worry, since the market’s re-embrace of denim has made jeanswear among the apparel industry’s most dynamic growth segments.

That makes the growth target set by Laurent Potdevin, Lululemon’s CEO, seem hyper-ambitious.

But it isn’t. The global activewear market is expected to hit $350 billion-plus by decade’s end. If Lululemon is able to execute on its growth strategy, its $4 billion in projected 2021 sales will account for only 0.1 per cent of that enormous market.

Meanwhile, the threat from denim’s resurgence seems distant. The leggings market that underpins much of Lululemon’s revenue base is still far outpacing jeanswear.

In an October survey of 6,500 U.S. upper-income teen females, U.S. securities firm Piper Jaffray found that what it classifies not as leggings but as “leggings/Lululemon” remains the trendiest apparel option.

More surprising is the wide gap in preference. Among those highest-spending teens — and it’s youth who set trends for the entire market — 25 per cent put “leggings/Lululemon” atop their fashion preferences. “Ripped jeans” scored just 4 per cent, and conventional jeans only 3 per cent.

So while denim is gaining, closing the gap with Lululemon’s signature leggings will take some time. And common sense suggests that leggings and denim will co-exist in teen females’ wardrobes.

Lululemon’s own initiative in menswear is perhaps the most surprising positive for the company.

In North America, few brands are more strongly associated with women than Lululemon. Yet the firm derives an astonishing 20 per cent of U.S. sales from male customers. And Potdevin aims to double that. He’s convinced that menswear has potential to be a $1 billion business for Lululemon.

As it happens, women make most of the world’s consumer buying decisions. (They account, directly and indirectly, for about 85 per cent of vehicle-buying decisions, for instance). Lululemon’s female customers are often inclined to buy a menswear item at Lululemon for a friend or relative while visiting to pick up something for themselves.

More promising on that front is that Lululemon stores outside North America, most dating from after the company began targeting male customers a few years ago, opened as female/male stores and have a unisex brand image. Lululemon flagship stores recently opened in London, Seoul and Beijing are of the male/female format, in hopes of radiating a unisex image elsewhere in each national market.

Because of the high stock-market valuation it has so often has commanded, Lululemon has long been a target for short-sellers. But the shorts treat Lululemon as an apparel merchant like the others, which it isn’t.

Lululemon sells garments and lifestyle with equal vigour. Few major retailers work harder than Lululemon on relationship-building with customers.

The firm has about 1,600 employee “ambassadors” with acute knowledge not only of Lululemon’s product offerings but of personal training, fitness and sports regimes and health issues. Lululemon shuns celebrity endorsers, opting instead for employees who take yoga classes with their customers.

Read Also: Fred’s, a small drugstore chain, may become national player

That’s a management formula that builds repeat business from a loyal clientele. It also raises employee morale. Motivated employees keep costly turnover at a minimum, and they are more likely to upsell.

Finally, Lululemon has a customer base skewed to millennials, for whom Lululemon’s premium-priced goods are aspirational items. That gives the firm pricing power, based on its unique selling proposition of status, intimacy with customers, and an aura of wellness that would be difficult to replicate at otherwise formidable general merchants like Costco Wholesale Corp. and specialty ones like H&M Hennes & Mauritz AB.

In short, Lululemon fans don’t balk at $100 yoga pants for the same reason buyers of Roots and Canada Goose products don’t recoil from premium prices. Lululemon’s clientele has bought into a holistic style of life heavily influenced by the firm’s employees and products.

That point was made in a “buy” recommendation on Lululemon this month by the U.K. investment advisor Seeking Alpha: “We don’t believe (millennials) will wear Kmart-made activewear. They’re going to wear something that gains attention and the respect of their peers.”

Source: The Star


Please enter your comment!
Please enter your name here