Speaking at the William Blair 2017 Growth Stock Conference in San Francisco, Stuart Haselden, Lululemon’s COO and CFO, said that due to quick payback from extensive investments, growth in its online business is expected to bounce back in the second quarter “and accelerate in the second half.”
Online growth had slowed to show flat growth in the first quarter. As a result, management took aggressive steps to improve the visual merchandising as well as functionality of the website and has seen quick dividends. Comparing the website currently versus three months ago would reveal “much more engaging video content and more engaging photography that depicts the functionality of the product in a more powerful way,” stated Haselden.
The website is also able to show style options in a more effective manner. On the technical side, functionality improvements have been particularly instrumental in enhancing the website’s conversion rate.
Lululemon has undergone two website releases since April with additional ones being planned as part of a “major overhaul of the front end on second half,” said Haselden.
Lululemen has a goal of having e-commerce represent 25 percent of sales by 2020 but the company expects “that number can be well higher” given the success Lululemon is seeing as it blends its online and offline business as part of its omnichannel strategy.
“It’s a great business,” said Haselden of online. “It’s accretive to our operative profit margins and it’s a higher-margin business than our store business. But the degree to which our e-commerce and store businesses are being intertwined is hard to understate. That’s really the future of our business and the world frankly.”
The COO also talked up opportunities in men’s and international.
Men’s currently makes up 18 percent of overall sales and also has a goal of reaching 25 percent by 2020. Haselden said that given that Lululemon is “rooted around yoga and women’s apparel,” the differentiated product it offers to men “is still a bit of a secret.”
Ben Stubbington, formerly men’s creative director at Theory, was hired to oversee men’s last October and his first collections are expected to drum up excitement in the second half. A bigger focus is being placed on jackets and outerwear.
Also particularly helping men’s is its co-located model, in which Lululemon expands select “super productive” locations. In general, stores see a 50 percent increase in square footage and are experiencing a 30 to 40 percent jump in revenues. The bigger stores enable the retailer to merchandise men’s in a “more profitable and powerful way.”
As an example, Haselden noted that Lululemon’s store at Mall of America saw its square footage increase 50 percent, enabling its men’s space to expand 100 percent and its men’s sales to jump 80 percent on the same inventory. Fifteen expansions are set for this year on top of 12 last year.
Internationally, Lululemon is adding 15 stores in Asia and early success in Singapore, Hong Kong, Seoul and Tokyo has led to landlords asking to bring to brand to China. Said Haselden, “While awareness is still low, we’re seeing a deep appetite for the brand.”
In Europe, Lululemon is experiencing a “little bit slower progress” versus Asia but management still sees large potential in the region in the future.
Other recent successes include “This is Yoga,” its first branding campaign that has delivered 240 million impressions and 26 million video views. Haselden said the campaign is helping Lululemon’s team understand how to “stretch” its business model to “acquire new guests and to talk to people who don’t know us.”
He added, “It’s early days in determining on how to take this strategy forward but we’re really pleased the feedback we’ve gotten and the impact that we’re seeing.”
On the product side, the Enlite run bra, which had been under development for two years, ended up 300 percent over plan in its first two weeks post-launch. Haselden also noted that the bra is selling “just under $100” and seeing no resistance to price. Said Haselden, “The lesson we learned from this is when we deliver technical innovation that matters to our guest, price is not an issue.”
Another big success has been Mind Over Mile, its collaboration with volleyball legend, Kerri Walsh Jennings, that “sold out almost immediately” after it landed. The white collection also helped diversify the chain’s color mix “at a time we really needed it,” added Haselden.
Looking ahead, Haselden noted that the company had raised its guidance on its first-quarter conference call largely due to progress so far this year and its initiatives for the rest of the year. Excluding the impact of restructuring activities around its Ivivva brand, EPS is now expected in the range of $2.28 to $2.38 for the year, up from previous guidance between $2.26 to $2.36. In 2016, Lululemon earned $2.14.
Haselden said its turnaround in digital is “probably top of the list” behind management’s decision to lift guidance but encouraging responses to its innovations such as the Enlite bra and the This is Yoga campaign also played a role.
For the second quarter, overall comps are expected to rise low to mid single digits versus a flat comp in the first quarter. E-commerce comps are expected to rise in the low double to mid teens after being flat in Q1.
Haselden said the company expects the double-digit growth rate online will be a sustainable trend. Said Haselden, “It’s more reflective of where we’ve been over the last few years rather than the moment in time we had in Q1. We see that as the direct trajectory for us when we get it right.”
EPS in the second quarter is expected to come in the range of 33 to 35 cents a share, down from 38 cents in the same period a year ago.
Haselden noted that the rapid improvements online “comes with a price tag.” He estimated about Lululemon will absorb about 5 cents a share in expenses due to investments in technology on the website as well as “aggressive” steps to improve photography. He said the “lion’s share” of the costs on its digital efforts will fall in Q2 and Q3. The company expects to be able to better leverage SG&A beginning in Q4, and that will carry forward into 2018
Photo courtesy Lululemon