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New Report: Lululemon’s Path to Profitability an Uphill Climb

Still straining to recover from a gaffe-ridden 2013, yoga-clothier Lululemon has yet another problem to contend with: poorly situated new retail stores unlikely to draw enough foot traffic for profitability.

According to Signal Data Corp., a retail analysis firm that uses census data to assess the location quality of retail stores, Lululemon may have expanded its physical infrastructure unwisely. Looking at two crucial metrics–population density and aggregate income–the firm’s analysis concluded that Lululemon’s newest locations are clustered in areas that will probably house more price-sensitive consumers.

Last year, Lululemon opened stores in areas that averaged a population of 1.4 million, with an aggregate income of $42.1 million. This year, though, it largely launched new stores in areas that average a population of 1.3 million, with an aggregate income of $38.7 million. Jeremy Brunelli, head retail analyst at Signal, said, “The consumers in these new markets have less income and are more price sensitive.”

This spells trouble for the athletic apparel makers, reeling from a disappointing 2013. Once a rising star among athletic wear retailers, it has been plagued by financial setbacks and public relations disasters. But now the company is dedicated to a comeback, and to repairing an image that, for many, has lost its luster.

John Currie, the company’s chief financial officer, candidly commented on Lululemon’s recent travails. “2013, that’s a year that we’re quite happy to see going behind us … the quality problems that we had earlier in the year were a real wake-up call. You always hear the phrase that any PR is good PR. What we learned is that’s not always the case. I just wanted you to hear that we’re taking it seriously. Like, we get it.”

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Over the last eight months, Lululemon’s share prices plummeted nearly 40 percent. And the retailer recently announced it expects sales at established stores, acknowledged industry-wide as an important metric, will almost certainly drop for the current fiscal quarter. According to Faye Landes, a retail analyst at Cowen and Co., the worrying falloff in comparable store sales has been in the “high teens.”

Landes wrote, “”Weather is a likely issue, but we still view these results as abysmal. Lulu pointed to some mix issues, notably insufficient seasonal merchandise, but we’re not sure how or when this sort of thing will ever be ironed out.”

Part of Lululemon’s challenge, according to Landes, is that the principal sources of its sluggishness remain obscure. “We still don’t have much clarity on what exactly has led to such a sharp deceleration in sales, and therefore don’t know what the fixes are,” she wrote.

And important questions remain about the profile of Lululemon’s typical customer. Landes wrote, “We also don’t know whether Lulu’s core customer, who in many cases has many pieces of Lulu, has switched to more of a replacement cycle, which, if true, is not positive for the company’s growth rate.”

To only worsen matters, Lululemon’s manufacturing missteps were closely followed by a series of public relations debacles. As the retailer’s iconic yoga pants continued to attract criticism for inferior quality, specifically with regard to pilling, company founder “Chip” Wilson suggested the construction of the pants was acceptable, and that it was customers’ bodies that were to blame. He infamously remarked, “Quite frankly some women’s bodies just actually don’t work for it. It’s really about the rubbing through the thighs, how much pressure is there.” Unsurprisingly, a maelstrom of negative press ensued. As a result, Wilson relinquished his position as non-executive chairman of the board.

Signal’s analysis suggests that Lululemon’s path to reinvigorated sales will be an uphill one. According to its data, the new stores only generated 63 percent of the sales volume of previously existing locations in the fourth quarter. Signal measures new store productivity by dividing the estimated sales per square foot of stores open less than a year by the estimated sales per square foot of stores open more than a year.

Lululemon, however, does have certain advantages as a boutique retailer. According to Landes, the retailer still has a strong customer base. “Nearly 3 million U.S. adults name LULU as their first choice for athletic apparel brand – despite the company’s limited distribution, high price points, and extremely entrenched competition, including NIKE and UA [Under Armour]. This figure implies average sales of approximately $390 a year for each such LULU lover (we recognize that sales per customer vary widely – our data shows that 32% of LULU shoppers buy 3+ LULU items a year, and that 8% of LULU shoppers buy 6 or more items a year – and that LULU purchases are not limited to LULU lovers).”

And as battered as Lululemon’s reputation is these days, the brand still resonates well with those shoppers who identify strongly with a health and wellness fueled lifestyle. Landes observed, “Our data shows that the women, and men, whose athletic apparel brand of choice is LULU are also far more likely to be foodies and fashionistas, and they are much likely to lead a healthy lifestyle than others, including NIKE and UA fans. We do not think this limits the brand’s appeal or ultimate size, and believe that the strong association of the brand in consumers’ minds with a healthy lifestyle, as the data suggests, implies further growth ahead as healthy lifestyle trends continue to gain momentum.”