Lululemon CEO: The Future of Retail Is Bright
Nike Chief Executive Mark Parker has said that the U.S. retail landscape is “not in a steady state.” Kevin Plank, CEO of Under Armour, has acknowledged it is “a difficult time for many retailers out there.” But Laurent Potdevin, Lululemon Athletica’s chief executive, isn’t nearly as dour about the industry as brick-and-mortar players face continued pressure from e-commerce giants like Amazon.com.
“The future of retail is bright,” said Potdevin in an interview with Fortune. “It is different than what we are experiencing today. It is going to have to evolve.”
Lululemon (LULU) enjoyed a stock market rally on Friday, a day after the yoga- and running-gear maker reported better-than-expected sales and profit growth for the fiscal first quarter. But in another sign of how retail is forced to confront a challenging environment for physical stores, Lululemon also announced it would close all but 8 of the company’s youth-focused ivivva-branded stores.
Potdevin says the decision to close those stores was “not a reflection of the retail environment,” but because Lululemon doesn’t see that brand as a $1 billion opportunity like other growth levers that the company is pursuing in a bid to double sales to $4 billion annually over a five-year period. The initiatives that Lululemon is more bullish about include expanding abroad, especially in Asia and Europe, an expanding e-commerce business and the opportunity to sell more gear to men (only 20% of sales today are derived from men’s gear).
As it relates to the physical retail store experience, Lululemon is in a unique position as it is an apparel retailer that only sells its gear in Lululemon-operated stores. Rivals like Nike (NKE), Under Armour (UAA), and Adidas (ADDYY) all rely on relationships with department stores, sports specialty stores and other retail partners, as well as their own fleet of stores, to sell their clothes and shoes. That’s led to some challenges, as store closures are accelerating across America, including for major department stores and a slew of bankruptcies for sports-focused retailers.
Those wholesale-focused activewear makers have had to evolve. Under Armour was stunk by the bankruptcy of Sports Authority and inked a new partnership with Kohl’s (KSS). Nike and Adidas, meanwhile, are aiming to focus more on their own store fleet to give customers a differentiated in-store experience.
“You see the whole world of retail shifting to digital, a lot of people running away from retail,” said Potdevin. “We do retail incredibly well.”
Lululemon is trying to essentially place duel bets on retail: expanding the fleet of stores while also investing behind the e-commerce experience. On the physical store front, Lululemon has opened 40 new stores over the past four quarters and shuttered only two, ending the first quarter with 411 locations. Potdevin said Lululemon has also spent about two years building up a digital ecosystem and establishing a so-called “digital culture”—which he claims didn’t exist before before Lululemon’s brand had always been rooted in the in-person experience.
While Potdevin remains a retail bull, he does concede that physical in-store traffic is a “headwind.” It declined on a low-single digit basis in the first-quarter from a year ago, and again, that points to the problem that physical retailers are facing. Fewer shoppers are visiting malls and downtown shops, and that’s putting pressure on retail. Potdevin says traffic is sequentially improving, and the brand has gotten a boost from a recent national ad campaign that was developed to extend the company’s marketing beyond community driven events and local marketing.
Sam Poser, an analyst at SIG Susquehanna, gave Lululemon a mixed grade on the retail experience. He thinks the company’s merchants have been playing it too safe when it comes to the color assortment—seeing too many basic colors and not enough new colors and patterns, which are needed to get loyal customers to shop more. “All that being said, Lululemon does engage its customers very well, and those customers remain loyal,” wrote Poser in a research note.
Meanwhile, Lululemon’s digital bet hasn’t always been smooth. Earlier this year, Lululemon blamed underperformance during the fourth quarter and a “slow start” in the new year on a soft performance for the e-commerce channel because Lululemon wasn’t featuring enough bolder colors for the company’s gear. The digital head, Miguel Almeida, left the company earlier this year and Lululemon also recently suffered a roughly 20-hour website outage that it blamed on IBM. Analysts were encouraged by a return to growth for the e-commerce business, but expressed some concern about how it was being achieved.
“A return to double-digit growth is promising, however, this is being fueled in part by incremental digital investments that raise concerns about the sustainability and profitability of current direct-to-consumer growth trends,” wrote D.A. Davidson analyst Andrew Burns in a research note.