Lululemon's Next Workout
Lots of chief executives talk about keeping an ear to the ground. Few do it. Even fewer do it literally. But on a recent Sunday in Vancouver, B.C., Christine Day, the incoming CEO of yoga apparel retailer Lululemon Athletica, was on her hands and knees in a fitting room hemming pants. That's standard operating procedure at Lululemon. Every worker, from the C-suite to the accountants to the design team, must spend at least eight hours a month working in stores—an unusual mandate for a retailer. It's a way to keep close to the company's carefully cultivated and well-heeled clientele: the burgeoning Yoga Class.
Serving that niche with a laser-like focus has paid off for the Vancouver retailer. In 2007, sales rose 85%, to $275 million; profits leapt 300%, to $31 million; and the company raised $344 million in an initial public offering. Lululemon fans shell out $92 for a pair of workout pants, compared with $60 at Nike (NKE) or $70 at Under Armour (UA), according to research firm ThinkEquity Partners. No wonder, then, that at most of its 86 warehouse-chic stores, Lululemon sells $1,710 worth of gear per square foot—about triple the rate of red-hot retailers Abercrombie & Fitch (AWF) and J. Crew (JCG). "It's the best growth story in retail today," says Paul Lejuez, a senior analyst at Credit Suisse (CS).
As Day takes over—her official start is June 4—Lululemon is at a precarious point. It plans to increase its U.S. store count from 38 to 69 this year, with a goal of 300 over the next few years. But inventory problems have crimped margins, since the company had to pay extra to ship out-of-stock items to stores by air. Amid worries over cash-strapped U.S. consumers, the stock price, which rocketed to 60 after going public at 18, has fallen back to 31. How Day manages the rapid growth will determine whether Lululemon fades away, like so many once-hip retailers, or becomes a lasting franchise.
Day most recently ran Asia-Pacific operations at Starbucks, which serves as both a growth template and a cautionary tale for Lululemon. "At Starbucks, we moved too quickly away from the authentic Italian espresso," she says. CEO Howard Schultz hired her in 1986 as his assistant. She took care of everything from bookkeeping to human resources and quickly moved up the management ranks. In his memoir, Schultz credits Day for her early insight that the coffee chain's stores should be designed as "sisters—each with an individual appearance, but clearly from the same family." In her most recent post, as head of Asia, Day oversaw a side of Starbucks' business that is still growing furiously even as U.S. stores slump.
Lululemon has been quietly growing since 1998, when it was founded by Dennis "Chip" Wilson, a Canadian entrepreneur who had previously founded a surf, skate, and snowboard company. After attending a yoga class, he found the cotton-polyester blends most people wore to the studio were uncomfortable and ill-fitting, and they collected sweat. He created a black exercise pant for women made of fabric that would wick away perspiration and fit well, too. In 2000, Wilson, still the company's design chief, opened a small design and retail space in Vancouver that doubled as a yoga studio. He created clothing during the day and tweaked it based on feedback from students who took yoga classes in the same space at night.
Linking with local gurus has been crucial. Before Lululemon opens a store in a new city, it approaches yogis or other fitness class teachers. In exchange for a year's worth of clothing, they become Lululemon "ambassadors," wearing the duds in front of students and giving the company design feedback. They also host students at private sales and free classes sponsored by Lululemon in unmarked lofts or condo spaces.
Now the pressure's on Day to expand Lululemon beyond yoga into sports such as running, swimming, and biking. Outgoing CEO Robert Meers, who previously led Reebok International, put together a management team of retail vets from the likes of Nike, The Limited (LTD), and Abercrombie (RL). Day, though, has been visiting stores and picking up tips from workers on the line. At regular breakfast meetings, she's fond of asking employees: "What's the most idiotic thing we did in the last 60 days?"
SIDESWIPED BY SEAWEED
Early on, Lululemon dodged a bullet. In November, The New York Times reported the company made false claims about a line of clothing infused with seaweed that purported to moisturize skin during exercise. Lululemon says third-party tests confirmed its garments contained a seaweed derivative, but it removed the claims from labels.
A more pressing challenge is inventory. Analysts say stores in coastal areas often run short of small sizes and those in the Midwest sell out of larger sizes. Day says the company has rolled out a new inventory-management system and will spend up to $1 million on a direct-sales Web site. Day is quite aware that, in a recession that's punishing other retailers, she'll have a brief window in which to fix the glitches. "You can't be complacent about blaming the economy," she says, "when it's probably some operating...issue you're trying to get right."
To watch a video interview with incoming Lululemon CEO Christine Day, go to businessweek.com/go/tv/lululemon.
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