Lululemon’s CEO has cut waste and rebuilt customer trust after yoga pants were recalled for becoming sheer when the wearer bent over. Now he’s staking the company’s future on innovation, including pants that make women feel naked when they wear them.
Lululemon Athletica is at a turning point.
It’s been two years since the Vancouver, B.C., activewear company brought in Laurent Potdevin as chief executive. His task: Cut the waste and expense of designing, making and distributing its garments, and rebuild customer trust after the 2013 recall of $98 yoga pants for becoming sheer when the wearer bent over.
Now Potdevin is staking the company’s future on innovation, including pants that make women feel naked when they wear them.
He is looking to improve profit margins while beating back growing competition in a niche market where clothing trends may be turning against Lululemon.
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Potdevin’s goal is to cement the retailer’s reputation as the top-quality athletic-apparel maker, justifying its higher prices, and change its perception to a brand worn by top athletes as well as wealthy women saluting the sun in urban yoga studios.
“Everyone’s got a magic number for what they’re willing to pay for quality,” said Bridget Weishaar, a Chicago analyst with Morningstar. “It’s not like your option is Lululemon or Old Navy. You can trade down just a very little bit and still get a really good product.”
The growth of athleisure — workout clothes worn on the street — expanded the market for companies such as Lululemon, Weishaar said. When shoppers return to denim and blazers, Lululemon could be left with fewer customers willing to fill their closets with expensive workout gear.
Potdevin, who meditates twice a day, doesn’t seem worried. Sales at stores open at least a year and online have grown in the past five quarters.
On Monday, the company boosted its fourth-quarter earnings forecast, citing a “very successful holiday season.” Lululemon now sees profit per share in the current quarter of 78 to 80 cents, compared with an earlier estimate of up to 78 cents. Analysts had forecast earnings of 77 cents a share.
Gross margins in the three months ended Nov. 1 fell 6.9 percent from a year earlier, according to data compiled by Bloomberg. Margins for the current quarter are in line with previous estimates, and revenue is likely to be higher than expected, the company said. Revenue will be as much as $695 million, more than the $685 million the company previously estimated.
Athleisure may be a fad, but customers’ focus on health and mindfulness won’t change, Potdevin said at Lululemon’s campus.
Lululemon argues that competition from heavy hitters such as Nike and Under Armour, as well as athleisure upstarts Express and Urban Outfitters, will drive consumers to seek better quality and lead them to Lululemon.
But making clothes for serious athletes is challenging, said Camilo Lyon, a New York-based analyst for Canaccord Genuity. “That’s a tough game to play,” he said.
And it’s hard to tell how much more they can charge, Lyon said. “They’ve already got premium pricing in the market.”
Potdevin said the company isn’t trying to compete on price. “It’s about getting involved in more categories across men and women,” he said. “It’s about solving problems for the athlete.”
When Potdevin took over, Lululemon’s supply chain needed fixing. Quality checks made its process slow and expensive. New products resulted in wasted fabric.
To get clothes to shelves faster, more than 40 percent of items were shipped to distribution centers by air, which is about four times as costly as shipping by sea. That had to stop, Chief Financial Officer Stuart Haselden said.
Now the focus is on innovation, Potdevin said. Whitespace, the company’s research-and-development center, has tested apparel in extreme environments in Alaska and has a lab on the Vancouver campus that can replicate different climates.
The company invested in a team of 35 people who work as long as five years on new designs and measuring factors such as sweat and laundering.
Whitespace helped conceive the new pants whose soft fabric mimics the feeling of being naked. Customer response has been strong. Same-store sales of women’s bottoms grew 27 percent last quarter from the same period a year earlier.
Lululemon uses Noble Biomaterials’s X-Static technology, which has the natural antimicrobial properties of silver to stop garments from smelling bad after a workout. But the company’s competitors can do that, too, and do it cheaper.
An “anti-stink” tank top at Lululemon costs $48, while Athleta’s version of an “unstinkable” tank costs $44 and is often on sale for half that.
Initiatives that drive sales but have slimmer profit margins are being put on hold. The company’s children’s brand, Ivivva, is a hit among middle-school girls in New York City, according to Haselden, who has daughters aged 10 and 8 and recently moved from there to Vancouver.
But kids clothing is made with the same technical fabrics as adult gear and is sold at lower prices, so the company will be slowing Ivivva store openings until it’s certain it has the model just right, he said.
To avoid abandonment by trendy adult customers migrating to the next big thing, the retailer has focused on athletes, mainly its brand ambassadors who work with the company to develop and design products and wear them to events. The company will outfit the Canadian men’s and women’s national beach-volleyball teams for the 2016 Olympics in Brazil.
Said Haselden: “I’m excited for us to play offense again.”