The red-hot athleisure trend is showing no signs of slowing down as it continues to sweep the mainstream — Amazon and Target both have their own private-label athletic lines — but Lululemon, a major pioneer of the trend, has stayed ahead of the pack.
Even with an improved economy helping deliver better-than-expected quarterly results for most retailers recently, Lululemon’s scorecard from late Thursday is still a thing of envy in the industry: Comparable sales, excluding currency impact, rose a better-than-expected 19%, including a 10% increase from its stores and a 47% jump online. Customer visits both to stores and online increased, as did the conversion rate, referring to the percentage of visitors who ended up buying.
Total sales in the quarter ending July 29 rose 25% to $723.5 million.
But what’s more noteworthy is that at a time when many retailers have increased sales at the cost of profit, Lululemon’s gross margin, the percentage of sales left minus the cost of goods sold, widened by 3.6 percentage points to 54.8% — above even that of athletics giant Nike. Lululemon said it reduced discounts and sold even more products at full price while lowering its selling, general and administrative expenses as a percentage of sales. The result? Profit almost doubled.
The Vancouver-based company, known for its yoga-inspired athletic clothing, also raised its forecast for the year. Lululemon shares surged 15% in early Friday trading to another record high of $157.50.
Yes, Lululemon is still small in size — its sales projection for this year (up to $3.2 billion) still puts it at less than one-tenth Nike’s size, for instance. But the company has shown that having a product that consumers covet is what sustains and drives growth, in contrast to other brands like Gap and Victoria’s Secret that have faltered because their products have failed to resonate.
Lululemon reported a better-than-expected 30% increase in women’s pants, its most profitable category. The company continues to introduce new fabric, colors, styles and prints that keep customers coming back. Just scroll through Lululemon’s Facebook page and see the mostly positive customer comments about each of its new designs. If there were complaints at all, they were mostly about a problem most other fashion brands would like to have: customers not being able to find some products that were sold out or styles in their sizes.
“Innovation matters," COO Stuart Haselden said on the company’s earnings call Thursday night. "Where we innovate in fabric, function and technical performance, it opens avenues for growth that in many ways are boundless."
He pointed to such examples as Lululemon's new On the Fly pant line as part of its “office travel commute offerings,” which the company said is a “versatile, multi-use product” that consumers can wear to and outside of work.
“I just bought a pair and considering to get another,” a Facebook user self-identified as Silvia Manca said in response to a July Lululemon post on a pair of $98 On the Fly pants. “They are so comfy and stylish.”
But it’s not just women's pants that hit the mark. Women’s tops rose in “another healthy double-digit” percentage. Accessories, including backpacks, rose over 20%, the biggest quarterly increase in the last five years. Men’s, a key growth opportunity for Lululemon, also saw sales rise by a double-digit percentage — another sign that Lululemon is no longer a niche player and could become a real threat to the likes of Nike and Adidas. Haselden said product assortments “performed well across practically every category.”
Lululemon has also continued to attract shoppers through grassroots marketing efforts, such as hosting a SweatLife festival in London, 10K runs in Toronto and “accessible” yoga classes in 50-plus cities globally on the International Day of Yoga on June 21.
In response to the growing trend of tailored messages and product offerings to individual consumers, Lululemon said it has started to embed its data scientist teams within its brand teams to drive sales, citing a "successful" Father's Day campaign as an example. It's also doubled the number of customers it can communicate with online in the past year and increased its “email file” by 80% last quarter.
Internationally, Lululemon has opened an online store on WeChat, the top mobile messaging app in China, its key growth market. The company also plans to sell online in Korea and Japan later this year. Comparable sales in Asia rose 50% last quarter. In Europe, they rose “in the strong double digits.”
After former CEO Laurent Potdevin resigned in February following what Lululemon described as behavior that fell short of its standards, the company in July named Calvin McDonald — former president and CEO of the Americas of another industry outperformer, Sephora — its new CEO. Analysts have said his experience leading Sephora, a poster child for personalized offerings and using mobile and online marketing to bring customers to stores, bodes well for Lululemon.
Both Sephora and Lululemon are “experiential retailers,” McDonald, who joined the company less than two weeks ago, said on the call, adding that he’s been an “avid” Lululemon customer for years. “The product logically extends itself to creating something truly unique in this space where it’s that connection between both heart and mind, and how we activate that product through experiences, that only enhances what it is we sell.”
In fashion, product is what counts at the end of the day. Lululemon can likely expect tailwinds to push its growth story forward.
Related on Forbes: Gap can no longer coast on being an iconic American brand
Related on Forbes: The real problem behind Victoria's Secret's dramatic fall
Related on Forbes: This shows Amazon's private-label ambitions
