Lululemon is making strides after being hit by problems with the quality of its products

Lululemon is making strides after being hit by problems with the quality of its products

Canadian yoga wear brand Lululemon Athletica says it has turned an important corner and will be relentless about accelerating forward, after revealing third-quarter earnings that beat expectations.

The company yesterday (11 December) reported net income for the three months to 2 November of US$60.5m, or $0.42 per share, compared to earnings of $66.1m, or $0.45 per share, in the year ago period. Analysts on average had expected earnings of $0.38 per share.

Speaking on the firm's earnings call, CEO Laurent Potdevin said Lululemon was pleased to see sequential improvements in each month of the quarter, driven by product stores and new allocation.

"I assure you the success of the third quarter to be ongoing foundational work as we've described in the past, building our talent pool, improving our processes and integrating brand and product. We have turned an important corner and we'll continue to be relentless about keeping the slide while turning and accelerating."

Potdevin noted that the firm was pleased with its November performance, including a "very strong" Black Friday performance.

Brand sentiment
After being hit by problems with the quality of its products, Lululemon has been refocusing on better design, speeding up its supply chain, shifting to more seasonal terms, and accelerating its global expansion efforts.

Potdevin told analysts: "We're seeing much greater brand sentiments and we're seeing much greater traffic. We've got very loyal guests and she's coming back and she's coming back more often. So I think it's really a combination of gaining that core loyal consumer and giving her a lot more opportunities to engage with us and buy with us more often and bring new guests as well."

Traffic, CFO John Currie added, has continued to build, with the third quarter stronger than the previous. He also pointed to improvements in brand sentiment, product assortment, and store productivity.

Lululemon has been shifting its focus from simply building foundation investments to supply chain improvements in order to drive growth. As a result, the company is working on a roadmap to return to gross margin in the mid-50s range. In its third-quarter, gross margin contracted 360 basis points to 50.3%, after a fall in product margin due to unfavourable sales mix, greater input price, weakening Australian and Canadian currency, and inefficiencies in supply chain networks.

Roadmap to recovery
The supply chain, however, is currently a key focus for the group. This involves further investment in R&D, i.e. work on fabrics and seamless [apparel], in addition to guest experiences both online and in-store, and international development.

Currie explained: "As we've said throughout the year, 2014 has been a year of investment in supply chain. Generally speaking, in 2014/2015, we'll continue to invest with a run rate of a bigger, more capable, team to deliver the benefits to product margin and gross margin that we've talked about for 2016.

"We continue to see the roadmap to get back to that sort of mid-50s gross margin that we had been at. Of course as you layer on the new markets that are really Asia and Europe, effectively start-ups, initially there will be a lower margin profile but when they reach a relative level of maturity, that drag will go."

While Potdevin added: "Next year, we will finish the foundation work in our product engine, go-to-market process and supply chain, but we can see the tangible pay out in 2015 that we had outlined in prior calls."

Lululemon has been proactively building on demand for the brand outside of North America, and on its last call outlined goals to have 40 new stores in Europe and Asia by 2017.

He told analysts: "Our 2015 international real-estate pipeline is very robust and we are on-track to open our first store in the Middle East in the second half of 2015. Our Singapore store is set to open [today]."

Supply chain challenges  
Potdevin did, however, highlight challenges in its supply chain, predominantly involving the West Coast port talks, which has impacted most retailers in the run up to the busy Christmas shopping period.

"Looking ahead to the remainder of the quarter, our team continues to monitor and assess the situation at the West Coast port. Our business is sensitive to this disruption since we schedule a constant replenishment of our inventory [and] we still need product drawn at our store. With the slowdown at the West Coast port[s] and units still under water, we are actively implementing a number of strategies to mitigate the delivery issues."

Potdevin said the company has been experiencing delays of seven to ten days, and on that basis estimates a potential impact on fourth-quarter and year-end revenue guidance by around $10m.

"We are continuously assessing this situation and our entire team is focused on supporting the upcoming key holiday selling weeks and maintaining our positive trajectory into January."

Nonetheless, he concluded: "We continue to invest in R&D dollars, new fabrics, innovative construction, and the expansion of our offering across new categories. I'm very inspired with the pace at which we're making progress and look forward to sharing more details with you as we move into next year."