Lululemon: Fears Of A Slow Start To 2017 Spook Investors Into A Selling Frenzy

Lululemon Athletica (NASDAQ:LULU) posted quite a solid quarter to end 2016. Reported earnings of $1 per share fell short of the analyst estimate by a meager one cent. Additionally, revenues came in higher than expected at around $790 million, reflecting a 12% increase in sales year-over-year. However, despite the strong performance, the company has estimated that sales at existing stores — a key retail measure — would drop in the low single digits in the coming quarter, while e-commerce sales witness a slowdown. This led to massive sell off of almost 17% in after hours trading.

The management expects revenues in the first quarter of FY 2017 to lie within the $510 million to $525 million range, while earnings per share ring in between $0.25 to $0.27. Analysts have estimated the revenues to touch upwards of $550 million, with an EPS of $0.39.

Why Are Q1 Sales Slowing?

The slowing sales trend in the current quarter has significantly hurt its e-commerce business. This is extremely worrying considering online apparel sales are improving the world over at the moment. CEO Laurent Potdevin has cited a lack of color choices in its spring line and the failure of the website’s interface in correctly displaying its “design vision” as the reasons for the decline.

That said, he mentioned that the problems have now been identified and the company is working hard at cross correcting the issues, with early indications reflecting an immediate and positive impact. New designs and colors are expected to hit the shelf as early as next week.

Furthermore, the company expects the footfall in its retail stores to slow down in the current quarter as a result of diminishing growth in brick-and-mortar traffic across the industry.

What’s In Store For Lululemon In 2017?

As mentioned on the previous call, Lululemon has three key areas of focus — enhancing the digital platform, international expansion, and product innovations. In last night’s call, Mr. Potdevin elaborated further on possible growth drivers. He also reiterated the company’s commitment to achieve its target of pushing its sales past the $4 billion mark by 2020.

• Strategic marketing: The company has tied up with a leading creative agency to propagate the brand name globally. As early as Q2, the company hopes to launch its first global marketing campaign that it expects will strengthen guest loyalty, while garnering millions of new customers. This is a bold step in the right direction, considering the company’s brand image is pale in comparison to competitors like Nike and Adidas.

• Continued innovation: In the sports apparel industry, constant innovation is the key to have/maintain an edge over other competitors. So far, the company has been a leading innovator in the women’s bottoms segment, and by the looks of it, will continue to remain so in the coming quarters, thanks to its latest Fast & Free collection, designed with its top-performing Nulux fabric. The company sees this  as a game changer that is bound to drive the top line in 2017.

• Increased focus on growing the Men’s segment: A clear design direction and increasing brand awareness is expected to result in accelerated growth in the men’s category by the second half of the year. So far, Lululemon has seen increased interaction in the segment, especially in its co-located stores. Additionally, it hopes to increase the number of stores carrying men’s clothing significantly in 2017, while further optimizing its Men’s expense online to capture additional sales. The company has reiterated that the segment has the potential to become a $1 billion plus business by 2020.

• International expansion: The company is focused on tapping into newer markets in an attempt to scale its business. In this regard, Lululemon marked its entry into China over the last two quarters. The country’s activewear market stands at a massive $28 billion dollars. With a growing middle class segment and more than 450 million millennials, the company sees China as a potential goldmine that could significantly drive the top line in the future. For this reason, China will be the company’s top priority for 2017.

• Building a digital ecosystem: The company’s focus has been to bring to life its design vision, pulling through a combination of engaging storytelling, personalization, and assortment, while making the e-commerce experience scalable, easy, and frictionless. In today’s day and age, it is essential for the company to have a digital footprint that gives the consumer easy access to what the company is and what it has to offer. Lululemon is concentrating on making the online experience as engaging and seamless as possible.

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