Go to the Globe and Mail homepage

Jump to main navigationJump to main content

A Lululemon in Kitsilano, B.C. (RICHARD LAM)
A Lululemon in Kitsilano, B.C. (RICHARD LAM)

Lululemon's problem? Customers can't get enough Add to ...

Lululemon Athletica Inc. has stretched its inventory too thin.

The popular yoga-wear company has made a practice of creating pent-up demand for some of its pants and hoodies by limiting supply. But now, the Vancouver-based chain is grappling with such high demand that the company can't keep enough product in stock, and that's beginning to scare off investors.

More related to this story

Sales growth has slowed. And even though its fourth-quarter results on Thursday were strong and beat analysts' forecasts, investor reaction to the company's out-of-stock snags was swift and painful: Its shares tumbled 4.4 per cent on the Toronto Stock Exchange as investors worry Lululemon, whose shares have about doubled in the past year, is running out of steam.

Too much demand for a product might seem like a good thing, but it's a problem that's starting to squeeze Lululemon. In the fourth quarter, it reported a strong 28-per-cent increase in same-store sales. But it now expects those sales to rise in the first quarter in just the "low double digits." Howard Tubin, retail analyst at RBC Dominion Securities Inc., estimated that means 10 to 12 per cent.

For most retailers, that range of same-store sales gains would be good news. But Lululemon investors are accustomed to the company outperforming expectations. With the retailer's first-quarter outlook only matching forecasts - between 36 and 38 cents a share - investors are disappointed.

Over all, the inventory snafus shouldn't detract from Lululemon's solid fundamentals, Mr. Tubin said. "Inventories are clearly too lean and will likely hold back sales," he said. Still, it's "a high-class problem to have."

The company has been forced to fly in products rather than ship by sea to meet demand, but now it is low on stock and anticipates the situation to remain that way next month. The problem is due partly to inadequate product forecasting and partly to difficulty finding overseas suppliers for the merchandise, said Christine Day, chief executive officer.

As well, Lululemon is deliberately scaling back inventory for its fast-growing e-commerce site because it is preparing a major overhaul of its operations in mid-April, she said. At that time, will move them in-house from a third-party management system.

If the retailer had enough inventory to meet demand, same-store sales in the current first quarter probably would rise 20 per cent, as they did in February, chief financial officer John Currie said.

Lululemon is placing more orders for the fall and working with suppliers to get more fabrics faster. The company expects better inventory levels by the second half of the year.

Still, the retailer faces other pressures. Already in the fourth quarter it was pinched by higher costs of everything from cotton to nylon. The spiralling inflationary expenses will make it difficult to increase operating profit margins, Mr. Currie said.

It can offset the pain by better managing its own internal costs, he said. As well, Lululemon's burgeoning e-commerce business provides operating margins that are 10 per cent higher than those in its stores, he said. In the fourth quarter, e-commerce sales made up as much as 10 per cent of the chain's overall revenue; the company predicted that online sales will rise to 15 per cent of overall revenues in the mid term.

Others still argue say Lululemon can turn its inventory shortages into an advantage, spurring customers to rush to Lululemon's stores or its website to snap up products before they vanish.

"It's hurting them in the short term but, longer term, I think it could turn out to be a positive," said retail analyst Jennifer Black, president of Jennifer Black & Associates in Lake Oswego, Ore. "It creates more demand when there's less supply."



 
Live Discussion of LLL on StockTwits
More Discussion on LLL-T

More related to this story

In the know

Most popular video »

Highlights

More from The Globe and Mail

Most Popular Stories