Lululemon has fixed many problems, but it's not out of the woods yet
As athletic apparel retailer Lululemon looked to bounce back from a rough patch, it announced last fall plans to revamp and expand the assortment of its signature product, women's leggings. The new pants would be categorized by how snug they felt on the body, and they came with some head-scratching names, such as "held-in" and "naked."
The Web lit up with digital eye-rolling over lofty promotional language such as a promise on Lululemon's website that the "hugged" style would "feel like a comfortable embrace from a close friend."
But Lululemon customers, it seems, were far from put off. The company reported on Wednesday that sales in its women's pants category jumped a robust 19 percent between September and January, and helped fuel the company to $704.3 million in revenue in the most recent quarter, a 17 percent increase over the same period last year.
The upbeat response to the new offerings is a good sign for Lululemon. The retailer, which practically created the ultra-popular stylish yoga wear category, has had some challenges lately in giving customers what they want. It was slow to respond to "athleisure" trends such as printed leggings and cutout tops, and problems with its supply chain sometimes meant that shoppers were sometimes coming into its stores but leaving empty-handed when they didn't find what they were looking for.
Executives promised there would be more product refreshes to come: Lee Holman, the brand's creative director, said he would be doing a major re-evaluation of the women's tops business this year, with an eye toward making it easier to create head-to-toe outfits and to layer pieces on top of one another. in remarks to investors Wednesday, Holman suggested he's watching trends closely to make sure Lululemon is not back on its heels again: He talked, for example, about the team's move to embrace higher-waisted silhouettes and to cater to a new wave of exercise classes that blend high-sweat and low-sweat activities.
There are additional reasons for optimism about Lululemon. Foot traffic to its stores was up strongly in the fourth quarter, something particularly meaningful in a quarter when shopping mall traffic was generally lackluster. The chain was also more successful in selling expensive or full-price pieces, which could help its profit margins. And crucially, the company said its inventory levels were improving, a sign it is fixing some of its supply chain issues.
Investors cheered the results, sending the stock up nearly 11 percent on Wednesday. And the company outlined an ambitious plan to keep building on the momentum, saying it intends to double its profit and more than double its revenue by 2020.
And yet there are reasons to remain skeptical that Lululemon will find a way to get off the mat.
For starters, much of its revenue growth came from simply adding new stores. In fact, sales at stores open more than a year, an important indicator of retailer health, was up just 1 percent (or 5 percent, if you adjust for currency fluctuations). That suggests the retailer could be doing better at pulling more customers into its existing outposts.
And Lululemon pledged to "diversify its staple offering" for its fast-growing men's business with a focus on yoga, and also add gear for running and training, a strategy that would seem to put in greater competition for a customer that the likes of Nike and Under Armour have perhaps already cornered.
It also seems noteworthy that executives did not mention Ivivva, its relatively new chain of yoga clothes for kids, when they called out the pillars of Lululemon's growth strategy. Ivivva stores accounted for about one-third of the company's new openings in 2015.
What Lululemon will focus on instead is growing its core women's and men's businesses while also expanding its international and e-commerce business. With so many new entrants in the athleisure category, it remains to be seen whether these tactics will be enough to keep Lululemon from once again losing its balance.
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