Canadian Lulemon with more sales but international expansion has its price
For the second quarter ended August 2, 2015 Canadian Lululemon Athletica reports that net revenue for the quarter increased 16 % to USD 453.0 million from USD 390.7 million in the second quarter of fiscal 2015
Total comparable sales, which includes comparable store sales and direct to consumer, increased by 11 % for the second quarter on a constant dollar basis. Comparable store sales for the second quarter increased by 6 % on a constant dollar basis and direct to consumer revenue increased 35 % on a constant dollar basis.
Direct to consumer net revenue increased 30 % to USD 82.2 million, or 18.2 % of total Company revenue, in the second quarter of fiscal 2015, an increase from 16.2 % of total Company revenues in the second quarter of fiscal 2014. Gross profit for the quarter increased by 7% to USD 212.0 million, and as a percentage of net revenue gross profit was 46.8% for the quarter compared to 50.5% in the second quarter of fiscal 2014. This loss of margin was leading at the day of the announcement to a drop of 6 % in share price. Income from operations for the quarter decreased by 2 % to USD 66.6 million, and as a percentage of net revenue was 14.7 % compared to 17.4 % of net revenue in the second quarter of fiscal 2014.
During the second quarter of fiscal 2015, the Company repurchased 1.0 million shares of the Company’s common stock at an average cost of USD 63.96 per share.
The Company ended the second quarter of fiscal 2015 with USD 541.3 million in cash and cash equivalents compared to USD 725.1 million at the end of the second quarter of fiscal 2014. Inventory at the end of the second quarter of fiscal 2015 totalled USD 280.6 million compared to USD180.5 million at the end of the second quarter of fiscal 2014. The Company ended the quarter with 336 stores.
Laurent Potdevin, lululemon’s CEO, stated: “We exceeded our revenue targets for the past quarter, supported by strong performance from both our store and e-commerce channels. Looking to the remainder of the year, our team is laser focused on meeting our strategic key goals: grow our global collective, relentlessly innovate our product lines and continue to create transformational experiences for our guests.” Potdevin continued: “As our momentum continues to build, we are excited by the progress made with our international expansion, the launch of our new women’s pant wall last week, and successful brand-building events occurring around the globe.”
In general the results were under experts’ expectations. The forced international expansion seems to demand its toll. For example, Hong Kong is to as the Asian template. The store opening, in the upscale shopping mall of ifc in Central, comes four years after the Vancouver-based company entered the Hong Kong market, launching a local e-commerce site and opening three showrooms in the city.
“Inhale….exhale, keep breathing,” said instructor Victor Chau, as he led a group of about 200 people for an outdoor yoga session overlooking Victoria Harbour. The community event, held in July at a Hong Kong Island ferry pier, was staged to mark the opening of the first Hong Kong retail store of high-end fitness apparel brand lululemon athletica.
“We open showrooms to learn about local activities, to become part of the community and to provide a retail location that is unique to that area,” said Ken Lee, lululemon Asia-Pacific General Manager. “This showroom model gave us plenty of indication on what kind of appetite the consumer here has.”
Established in 1998, lululemon has made its name through its stylish designs and use of hi-tech fabric for odour control and improving comfort and fit. Named Canada’s most valuable retail brand, lululemon is largely credited for creating the market in fashionable sportswear, thanks to the global trend towards health and fitness. Activewear or athletic leisure wear has reportedly grown faster than the overall apparel market in recent years as more people wear exercise clothing casually. Analysts at Barclays estimate it could grow by almost 50 % in the United States to more than USD 100 billion at retail by 2020.
Asia, too, is fast catching on to the trend, and lululemon is tapping strong growth in the region. The Hong Kong fitness industry is estimated to be worth USD 300 million, with the city believed to have the highest penetration rate of health clubs in the region.
Apart from Hong Kong, where lululemon is set to open a second retail outlet later this month in the bustling shopping district of Causeway Bay on Hong Kong Island, it has also launched a retail store in Singapore, and showrooms in Seoul, Tokyo and Shanghai, with an eye on opening another in Beijing later this year.
As the company’s regional base, Hong Kong serves as its retail template for its stores in Asia. “The combination of connections we have built with the Hong Kong community and its strategic location in supporting our expansion throughout Asia have been key reasons to having our regional base here,” said Mr Lee.
Its Hong Kong store has already provided the company with important consumer preferences, not limited to local consumers. “We’ve been surprised by the wide range of guests,” said Mr Lee. “We expected more Chinese guests coming in, but it’s really equal; one-third Chinese, one-third local and the rest from elsewhere, so we’re accommodating a wide range of guests.
“We are learning every day; from guest preferences to how people will behave, as well as sizing. Hong Kong is of key importance to lululemon and can serve as a springboard to the rest of the region and support lululemon’s business expansion to innovate and position our offerings for the Asian market,” he added.
lululemon brand ambassadors strut their stuff at the ifc store opening. At the ifc store opening, lululemon introduced its so-called brand ambassadors from several local fitness studios, who best represent the lululemon and Hong Kong spirit. It’s one of several initiatives the company has launched to engage the local community, in keeping with its launch theme, choose Hong Kong.“Hong Kong is an amazing place,” said Lee. “We choose Hong Kong because we love it.”
lululemon is largely credited for creating the market in premium yoga wear. Apart from trams advertising the formal launch of lululemon stores, the company eschews traditional marketing means, opting instead to promote its presence through direct engagement with potential clients, by holding regular free yoga sessions at its showrooms and public parks. And in the run-up to the first store’s opening, staff paid weekly visits to individual ifc office tenants, offering free merchandise. “We are a mission-based organisation. Our value is in connecting with and being relevant to the local community. Hong Kong has a growing passion for yoga, running, cycling and general health and fitness. With that in mind, we are excited to open this store and offer our guests a broader assortment of products to support all the ways they like to keep fit.”
Recently, lululemon marked also its first presence in the French capital city of Paris.