Lululemon Athletica Inc. LLL-T has made a conscious decision to increase some of its costs and drop some prices to stimulate demand during the downturn, a move that is boosting sales but shaving profit.
The company made a strategic decision to improve the quality of some products, such as the zipper on its popular hoody, without passing on the extra cost to consumers in the form of higher prices, chief executive Christine Day told analysts on Thursday.
And to encourage shoppers to embrace yoga, the company lowered the price of its yoga mats and other accessories, resulting in a more than 40-per-cent spike in sales in the merchandise although margins are being pinched. For example, the price of its best selling yoga mat has been marked down to $28 from the previous $54.
“These are strategic decisions we are willing to make for the long-term good of the business,” she said.
Still, Lululemon's stock fell almost 11 per cent in early trading Thursday after the yoga-wear retailer reported a 23.5-per-cent drop in first-quarter profit and said it expects more of the same in the coming months.
Sales trends continue to improve and overall consumer response to our brand remains strong.
Lululemon's stock shares fell $1.88 to $14.94 on the Toronto Stock Exchange within hours of the morning announcement.
The company said its profit in the three months ended May 3 fell to $6.5-million or 9 cents a share from $8.5-million or 12 cents per share a year earlier. Revenue rose 6 per cent to $81.7-million from $77.0-million.
Still, Ms. Day said on a conference call that sales are improving as the company trims costs and offers new products – particularly running shorts and tops and fashions in bright colours rather than the ubiquitous black.
“Sales trends continue to improve and overall consumer response to our brand remains strong,” she said.
In the current recession, the company is sensitive to cash-strapped consumers who are wary of forking out too much on discretionary products, she said. They may be dropping their membership in gym clubs but are still looking for economical ways to exercise, she said.
In other moves that are squeezing margins, the company has switched to some better factories that may charge more, but deliver better products at faster speeds, she said. And it has priced new organic cotton and natural fabric products at lower levels than it otherwise would have done to help stimulate demand, she said.
And the company has incurred the added expense of extra shipping charges for sending products from overseas by air rather than boat to make sure stores are stocked. The retailer had found itself short of some items recently after having decided to scale back on inventory levels in the economic slump.
The company has spotted two consumer ideals emerging in the current downturn: “quality, functionality and beauty are the new luxury;” and “health, community and family and friends are the new wealth.”
Still, Lululemon's initiatives will continue to hurt its profit, with its second-quarter outlook in a range of 8-to-9-cents per share — about the same as in the first quarter. It says second-quarter revenue will increase to between $85- and $90-million.
The reduced profitability in the first quarter came as profit margins fell despite higher revenues. Gross profit as a percentage of net revenue decreased to 42.8 per cent in the first quarter, down from 53.4 per cent a year before.
Income from operations was $9.9-million, or 12.1 per cent of net revenue – down from $11.9-million or 15.5 per cent of net revenue a year before.
Lululemon's outlook calls for comparable-store sales to decline “in the mid-single digits” on a constant dollar basis in the second quarter compared with the year-earlier period.
In the first quarter, same-store sales in outlets open a year or more fell 8 per cent. Same-store sales is a key measure of retail health.
