Lululemon is planning a "very deliberate segmentation" of its supply chain as part of a bid to unlock efficiencies and build new capabilities around speed and flexibility

Lululemon is planning a "very deliberate segmentation" of its supply chain as part of a bid to unlock efficiencies and build new capabilities around speed and flexibility

As yogawear retailer Lululemon Athletica continues towards its vision of reaching revenues of US$4bn-plus by 2020, the Canadian company is confident its ongoing supply chain endeavours have already helped expand margins and cut costs – with further scope to dramatically improve speed and flexibility in how the brand brings product to market.

Lululemon has been hard at work to build the infrastructure it requires to support such an organisation, with the end goal of achieving $4bn in revenue by 2020. The brand reported net revenues of $2.34bn for fiscal 2016, a 14% increase on the previous year.

Over the course of the last year, the company says it has managed to expand product margin by over 350 basis points as well as reducing average unit cost (AUC).

Importantly, the company is optimistic there are still ongoing opportunities to improve product margin, not only from growth and scale economies in its sourcing structure, but also through a very deliberate segmentation of its supply chain.

On top of this, efforts are underway that "will allow us to dramatically improve our speed and flexibility in how we bring product to market," explains COO and CFO Stuart Haselden. "We are accomplishing this in several ways, including the development of a segmented supply chain to unlock efficiencies, staging fabric to better position us to chase demand, and implementing new speed models for our core and seasonal styles."

Speaking on the company's second-quarter earnings call today (1 September), Haselden adds Lululemon is able to source more efficiently by looking at how long products live on the shopfloor and the lifespan they have within its assortment.

"The opportunity that we have to stage fabric to be able to respond to demand as we see it emerging offers really important opportunities not only to capture incremental sales as we are in a better in-stock position but also do that in a favourable margin outcome," he told analysts. "Those are new capabilities we are looking to build. We are in a much stronger place to be able to play offense with our supply chain; a place where we didn't have those options a couple of years ago. So [we are] very excited to see these new opportunities emerging."

Meanwhile, Haselden also shared that one of Lululemon's key strategic sourcing partners is pursuing production facilities in Haiti – another factor that will help reduce lead times as well as realise freight and duty benefits.

He adds Lululemon is "certainly and constantly" looking at different sourcing regions in the world and to diversify its supplier base to create the strongest combination of suppliers. "The regional appeal of having something closer to our home market is pretty compelling and it's certainly something that we will look to explore and amplify where we see that it makes sense."

The comments come as Lululemon revealed a strong second-quarter that one analyst said was in "direct contrast" to those of many other sporting retailers lamenting subdued demand for athleisure, with both total and comparable sales surging ahead by 13% and 7%, respectively.

For the period ended 30 July, net revenue jumped 13% to $581.1m, compared to $515m in the year-ago period. Net income, meanwhile slipped 9.1% to $48.7m from $53.6m last year, but included a $4m charge linked to the closing of around 70% of its Ivivva stores as the brand transitions to a primarily e-commerce focused business. Gross margin in the quarter increased 180 basis points to 51.2%.

Technology and innovation

Meanwhile, Lululemon is continuing its technology drive, with plans to update and enhance its website – including checkout improvements – in the third quarter as part of a bid to further engage with shoppers in time for the critical holiday selling period.

Also in the pipeline are plans to build on the company's mobile experience and continue its work in enhancing inventory allocation systems to improve how it flows product to better anticipate customer demand.

In terms of product, Potdevin highlighted the success of the "revolutionary" Enlite sports bra during the quarter, which quickly became a top performer and validated what he calls the significant potential for disruptive innovative apparel.

Lululemon unveils "revolutionary" sports bra

And Lululemon aims to build on the success of its new designs with the launch of its newest fabric innovation – Everlux – in the third quarter. Designed for high-intensity workouts like spinning, where studio environment provides little air flow and high humidity, Everlux works to wick away sweat and has met with a positive initial response, particularly in China.

"Best kept secret"

Meanwhile, another avenue of potential for Lululemon is what CEO Laurent Potdevin calls "one of our best kept secrets": menswear. Also speaking on the analyst call he told listeners how the brand's second-quarter performance in men's "positively reflects the $1bn-plus plus potential ahead of us in this category by 2020."

Among Lululemon's male shoppers, average spend is up, as is the average number of products purchased.

For Neil Saunders, managing director of analysts GlobalData Retail, some of this is the result of a "much more comprehensive range of men's product", especially beyond bottoms, which is the traditional entry product to the brand. In addition, the focus on performance materials and features has also proved very popular. 

"In successfully pivoting from being a women's brand to one that now appeals to both genders, Lululemon stands in marked contrast to Under Armour, which has seen only limited success in attracting women," Saunders notes. "This augurs well for the future as we believe Lululemon has much more runway with male shoppers."

Looking ahead

For the rest of the year, Lululemon says it is on track to open 12 stores in Asia with six stores planned in the second half in China in Beijing, Guangzhou, Chengdu and Shenzhen. Meanwhile, in a move that broadens its Asian footprint, the company will open its first store in Japan later this year in the heart of Shinjuku.

For Saunders, Lululemon's second-quarter numbers are a testament to the company's brand strength, the credibility of its products, and to its constant focus on innovation.

"Someone, it seems, forgot to inform Lululemon that there is a slowdown in the growth of athleisure," he adds. "Its results stand in direct contrast to those of many other sporting retailers.

"Lululemon is proof that a well-configured, focused brand can secure customer loyalty far better than a retailer selling a diffuse range of different products with little coherence."

Meanwhile, Saunders adds the softer profit numbers are "perfectly acceptable, mainly as they are a consequence of the various investments and initiatives Lululemon is undertaking to strengthen its position in the market. Given these are bearing fruit, the long-term prognosis still looks good," he adds.

And the balance of the year remains positive for sales, with Saunders particularly encouraged about the holiday quarter as he expects Lululemon, once again, to be a key gifting brand. "While we caution that the restructuring of Ivivva and further investments may weigh down on the bottom line, this does not change the upward trajectory for Lululemon."