Lululemon Stretches the Right Muscles
You don't have to look too hard these days for signs trouble is brewing in the athletic apparel business.
Dick's Sporting Goods Inc. is cranking up the discounts to lure shoppers back to its struggling stores. Nike Inc. is scrambling to offer more innovative products and reduce its dependence on "mediocre" retailers. The stock prices of Under Armour Inc., Foot Locker Inc., and Finish Line Inc. have been slammed this year, each tumbling precipitously in response to disappointing sales.
I don't think so. It's not just that the company delivered upbeat quarterly results on Wednesday, including an 8 percent increase in comparable sales from a year earlier. It's that there is much to like about Lululemon's position in the marketplace relative to its competitors.
For one, Lululemon is apparently sitting out of an expensive marketing arms race seen elsewhere in the sector. Simeon Siegel, a retail analyst at Nomura Instinet, found in a 2016 analysis that Nike, Adidas AG and Under Armour each maintain rather hefty marketing budgets, spending 10 to 11 percent of total sales. By comparison, Siegel found the non-athletic companies he covered tend to spend about 3.5 percent of annual sales on marketing.
We don't know exactly where Lululemon falls on this spectrum, but we do know the company relies largely on local "brand ambassadors" -- yoga teachers, personal trainers, spin instructors and the like -- to spread the word about its goods. Even when it launched its first-ever global advertising campaign earlier this year, it was more about creating a mood than celebrity tie-ins. It's safe to assume this approach is cheaper than endorsements from high-wattage stars such as Lebron James, Steph Curry or Misty Copeland.
Rather than plowing cash into copycat marketing schemes that aren't a good fit for its brand, Lululemon has addressed its most urgent needs -- supply chain improvements and product innovation.
Lululemon has been working on everything from reducing its dependence on air freight to developing items such as the Enlite bra, which comes with a $98 price tag and has been flying off shelves. Such efforts have gone a long way toward protecting its profitability. In the latest quarter, gross profit was $322 million, up 16 percent from the same period last year.
Meanwhile, when you look at the widespread distress in the athletic apparel business, you see how much these companies feed into each other's troubles. Nike's product misses, for example, give shoppers less incentive to buy something when they visit a Foot Locker. Under Armour selling its product at Kohl's Corp. stores might have pulled some foot traffic away from Dick's. Finish Line and Foot Locker both have stores in lackluster malls, meaning they don't consistently provide a great selling environment for Nike's wares. It's going to be messy to unravel such a tangle of problems.
Lululemon, however, has much more control of its own destiny. It deliberately keeps its wholesale business tiny, confining it mostly to upscale fitness centers. And it has a relatively small store portfolio concentrated in the most productive shopping outlets.
Though its market capitalization is nowhere near that of Nike or Adidas, Lululemon is starting to pull away from some other big rivals in that measure -- including Under Armour, which not long ago was more than twice as valuable.
Under Armour's revenue haul in the latest fiscal year was more than double that of Lululemon's, and Dick's and Foot Locker's were even larger. But Lululemon has been stretching itself in the right directions to succeed in retail's next chapter. Investors are right to reward it.
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Mark Gongloff at firstname.lastname@example.org