Analysis: Product investment key to Lululemon Athletica growth
Lululemon intends to invest in a product development platform as part of its growth strategy
Investment is the name of the game. Well, that's the main focus for Canadian yoga wear brand Lululemon Athletica in the year ahead. The company has revealed plans to step up spending to support its product development platform, and accelerate its international expansion efforts.
The company saw its net profit for the fourth-quarter hold steady, after higher revenues offset lower comparable store sales and margins.
During the 13 weeks to 2 February, net income edged up 0.3% to CAD109.7m (US$98.9m), while revenue increased 7% to $521m on the prior year period.
On a conference call last week, CEO Laurent Potdevin said: "Going forward, we are refocusing the organisation on being design-led, about getting back to our roots and inventing the future, and we are doing that by fostering and promoting the healthy tension between technical innovation, style, function, and beauty.
"There will be no compromising, and it will bring out the best in us."
This is perhaps of particular importance given the challenges Lululemon faced last year. In March last year, the yoga brand recalled a line of its black Luon trousers from its stores after the fabric was found to be see-through. Eight months later, Lululemon faced fresh complaints about the quality of its merchandise.
The group's new chief product officer Tara Poseley is working to improve the balance of core and seasonal product/capsules during the second half of this year.
As the company's business matures in North America, Lululemon sees increased demand and success of its seasonal products taking a larger share of its overall product mix. The yoga wear retailer said it is experiencing sell through at a rate four times faster than anticipated.
"Impeccable quality is deeply rooted in our DNA. We are laser-focused on ensuring we have a world-class quality supply chain and organisation to support our current business and product platform for continued global growth."
"As we continue to build on the great work that has been done, we are seeing a constantly increasing level of our product meeting our very high quality standards."
Lululemon's ability to get this done over a short time, Potdevin noted, is a "true testament" to the team's effort, the strength of its vendors, and the partnerships it has with them.
This is further enhanced by the Lululemon presence the group has built on the ground in Asia, in its mills as well as its Taiwan and Hong Kong offices.
"There will be continued focus and investment in this area to ensure we're building a product development platform that will allow us to unlock our full global potential," Potdevin added.
Although a demand shift from consumers toward seasonal product has resulted in strong and fast sell throughs, CFO John Currie said Lululemon will "not have the depth to capture the demand in these categories in the first half of 2014" as the buys were placed six to nine months ago.
"While we are actively pursuing our opportunities to chase and fast turn product which will help mitigate some of this gap, our ability to buy deeper to rebalance our assortment to this shift in guest demand is weighted towards the back half of the year," Currie explained.
As part of its growth strategy, the company also outlined plans to speed up its global expansion efforts. "Looking forward, I see significant potential to grow both domestically and internationally as we leverage this company's outstanding business model, and I intend to accelerate our global expansion," Potdevin told investors.
There is clear evidence of demand for Lululemon products in Asia and Europe, he added, with several countries ready for stores. The group has also hired a general manager for Asia, who will drive new store openings as well as new markets.
"Additionally, we have opportunities to develop partnerships to increase speed to market and accelerate our international expansion in regions that are either too complex or don't have enough scale forward to have a direct presence in."
Lululemon will open its first store in London this week, with plans to open a second by the end of the year. And according to Potdevin, there is a "tremendous platform to showcase Lululemon not only in Europe but to the rest of the world".
For fiscal 2014, the retailer intends to open 42 corporate-owned stores in markets such as Australia and the UK, as well as up to ten new Ivivva stores.
Commenting on the yoga wear brand's fourth-quarter performance, UBS analyst Roxanne Myer said: "Lululemon remains a solid long-term growth story, driven by continued growth in the US and the likelihood of accelerated international expansion, as well as men's and e-commerce."
"However, we think sourcing issues will remain a drag through most of fiscal year 2014, view the revitalisation of core product as critical, and see higher fashion risk from a shift to more seasonal product."
While Mizuho Securities USA analyst Betty Chen said given issues with constrained seasonal product positioning, need to clear carryover core items, and weather impacting traffic, she views Lululemon as a seond half/fiscal 2015 story.
But she warned: "Although we are encouraged by consumer appetite for seasonal merchandise, the lower margin characteristic of the products along with the potential for increased markdown liability places long-term gross margin into question."
Meanwhile, RBC Capital Markets analyst Howard Tubin believes the bulk of bad news "is now in the rear view mirror", adding: "Product flows and inventory levels should get back on track during the spring season".
"In addition, we look for a return to positive comps in the fall as Tara Poseley's influence on the merchandise assortments begins to be seen."
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