Coming Out Stronger: Lululemon’s Winning Formula

In fact, the athletic apparel and accessories company might emerge from the pandemic with relatively fewer losses than other retailers.

By Kellie Ell on April 14, 2020

The current global health crisis isn’t producing many winners. Even so, some retailers are better positioned to weather the storm — and perhaps even come out stronger. 

One of them is Lululemon Athletica.

“What’s important to note about Lululemon — beyond what they’ve done from a business model perspective, in terms of their men’s business ramping up and then all the things they’ve done with innovation on the women’s side — is that their model’s perfect, on a relative basis for what we’re going through today,” Ike Boruchow, managing director and senior retail analyst at Wells Fargo, told WWD. 

That model includes a cash-positive balance sheet, high margins, low return rates, a lucrative e-commerce business and a loyal fan base. 

Boruchow pointed out that, pre-pandemic, Lululemon did about a third of its business online. (Industry average is closer to about 20 percent.) That’s because the retailer has invested heavily into its direct-to-consumer business by refining the web site and mobile apps. It’s also improved efficiencies in fulfillment and features like personalization that help build brand loyalty. 

That also helps explain why Lululemon’s return rates are so low — about 10 percent — compared with its peers, which have return rates between 40 and 50 percent. 

“The customer is so loyal and they do so much volume and there are these enthusiasts,” Boruchow explained. “They know what their size is; they know what they like. They know what to order. So, they’re not just buying five different sizes in the same product because they’re not sure if it’s going to fit or not.” 

Lululemon’s margins are also higher than its peers — about 20 to 25 percent — whereas some other retailers have margins closer to 5 percent. 

“In some cases lower,” Boruchow said. “What investors care about is margin structure. When your store revenue is zero, but you’ve got a third of the business on e-commerce — and by the way, that third of the business has probably grown 30 to 40 percent right now, and it’s that much with better margins — when that happens, you’ve got a business where the model actually sticks together really well. 

“In this other scenario, where workers are being furloughed and laid off and it’s all unfortunate, Lulu is very, very healthy,” he continued. “If you have a couple hundred basis points of margin erosion because stores are closed, that’s catastrophic for a company with low margins. But for them, they’re able to withstand that and shake it off. Because, they have so much margin to play with. Having this big form of revenue work the way it does really helps them.”

Add to that Lululemon’s higher average order values — which, with $148 hoodies and $78 yoga mats are not cheap — helping push margins even higher.  

Meanwhile, as stores in North America and Europe remain closed for the foreseeable future to help prevent the spread of the coronavirus — some estimates go as far as June 1 for store reopenings — Lululemon has said it will continue to pay all associates during this time, even as others announce furloughs.

But the Canadian-based athletic apparel- and accessories-maker might be one of the few retailers in a position to do so. Most recently, the company’s quarterly revenues surpassed more than a billion dollars, ending the period with more than a billion dollars in cash on its balance sheet and no debt.

On a conference call with analysts last month, Lululemon chief executive officer Calvin McDonald added that the company’s e-commerce business has picked up with stores closed, although not enough to offset losses. 

Still, there are a few noticeable areas of growth online. A Lululemon Instagram live session attracted more than 170,000 guests after the North American and European shutdown and McDonald said there’s been an uptick in things like yoga mats and yoga blocks as consumers tune in online to work out at home. 

The company also gained tens of thousands of followers on WeChat during the February lockdown in China and digital comps in the region increased 70 percent during the quarter.

The pandemic hasn’t hindered consumers’ desires for health and wellness either. In fact, it’s likely accelerated its growth. That’s more good news for athletic apparel- and footwear-makers.

“Health and wellness will be a supercharged theme walking out of this,” said Simeon Siegel, managing director and senior retail analyst at BMO Capital Markets. “The virus is impacting the immunocompromised the most. So, the idea of being healthy, the idea of getting out and stretching, is going to be absolutely critical.”

Even so, the looming global recession won’t do much to motivate consumers to buy yoga pants with a price tag of more than $100. In the last three weeks alone, roughly 16.7 million people in the U.S. have filed for unemployment. It stands to reason that consumers will be looking for discounts in the near-term.

And while Lululemon remains a value stock for long-term investors — up more than 21 percent year-over-year — shares fell by about 40 percent during the first two weeks of March as news of the coronavirus made its way around the globe, illustrating that the company isn’t immune to economic uncertainty. Trading at about $205 a share on Tuesday, Lululemon has yet to regain its Feb. 20 stock high of nearly $264 a share. 

But Boruchow said moving forward investors will be seeking companies with a clear path to growth.   

“This whole thing that we’re in right now is pointing investors to look for models that really are just better than others,” he said. “And I think Lulu’s model really shines in an environment like this.” 

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