News

From the outside, it looks like any other nondescript warehouse-style building with a view of the mountains on a clear day. But it's what goes on inside that sets it apart from your average corporate headquarters: The halls are filled with fit, hip staffers in their 20s and 30s, outfitted in bright-coloured tank tops and snug-fitting stretch pants, and rushing to meetings in flip-flops and runners. Stroll through the on-site workout room, filled with yoga mats, free weights and exercise balls, and you might overhear the company's community relations manager discussing a marketing idea while breaking a sweat on a stationary bike. Take a seat on the worn red couch in the open-concept lobby—cluttered with bicycles, backpacks and unopened boxes—and you could catch employees exchanging comments about Stephen Covey's The 7 Habits of Highly Effective People, one of the self-help business titles stocked in the staff library. And wander up and down the stairwells of the three-storey building, and you'll get glimpses of the dreams and aspirations of every employee: Sheets of paper dot the walls, listing short- and long-term personal, health and career goals. Some pledge to read and work out more often, while others, including company founder Dennis (Chip) Wilson, promise to get home to their families before dinner.

Welcome to Lululemon Athletica, the company behind one of the hottest initial public offerings in Canadian history. Not only did the stock soar after opening on the Toronto Stock Exchange in late July at an initial trading price of $28.99, touching a stunning $56.61 in October, but its mind-body-connection corporate mantra had the Street hooked.

It's not just a retailer, "it's a mass cult," raved Jim Cramer, host of CNBC's Mad Money, who appeared with a Lululemon headband wrapped around his mostly bald head during one of two televised plugs he gave the trendy, Vancouver-based activewear chain this fall.

It isn't just Wall Street waving the flag. Svelte celebrities such as Madonna, Brooke Shields and Sting are part of the following, as is the sworn-to-clean-living Paris Hilton, who was spotted stocking up on Lululemon gear in Toronto just weeks after being sprung from a California prison.

That kind of buzz, alongside the company's own grassroots marketing campaign, has turned Lululemon from a one-store operation (launched in 1998) into an international retailer with 78 stores, including 37 in Canada, 34 in the United States, four in Japan and three in Australia.

But the thriving chain isn't finished yet. It's planning to open another 30 to 35 stores in 2008 and has set a goal to roll out an additional 200 to 300 stores, the bulk of which are planned for what the company sees as the underserved U.S. market.

So far, the expansion plans are on track, although by late October, industry watchers, including the voluble Cramer, were beginning to wonder whether the company—and its stock—could maintain the feverish momentum. When the share price dipped below $50 (U.S.), the Mad Money host recommended that shareholders start cashing out: "Don't be slaughtered, take the gain," he told investors. Goldman Sachs Group analyst Margaret Mager, meanwhile, downgraded her rating on the shares from "buy" to "neutral," saying they're overvalued. Given the failure of many Canadian companies that have tried to make it in the notoriously cutthroat U.S. retail market, investors can't help but bite their nails as they wait to see if Lululemon can clear the same hurdles without stumbling.

Lululemon's philosophy is a mix of healthy living and warm, fuzzy concepts such as the Law of Attraction, a belief that your thoughts determine your destiny, and a similar movement called The Secret, recently made famous by Oprah Winfrey.

Wilson says those beliefs are behind his company's success, telling analysts in the company's first earnings conference call that the principles reflected in his products helped attract "incredible people" to Lululemon. "And then I think what's resulted out of that is phenomenal profits. That attracted capital investors and even better management, and then created even better cash flow." It sounds simple, but there's more behind Lululemon's success so far than the power of positive thinking.

Wilson, 52, who was born in San Diego and raised mostly in Calgary, may have been genetically predisposed to launch a line of recreational wear: His father was a gym teacher and his mother a seamstress. He originally tried veering from the family career history by going to university to study dentistry, but wound up taking economics instead. After graduation, he took a job as a land-lease negotiator for the now defunct Alberta oil and gas firm Dome Petroleum, but a passion to make pants never left him.

His first foray into athletic fashion was in 1979, when he made a line of long, baggy men's shorts and sold them at a booth in a Calgary mall under the name Westbeach. He sized them to fit his then-bulky 6-foot-3-inch, 260-pound frame (today he weighs about 240, with a target weight of less than 230), and eventually incorporated more sizes for boys and older men looking for a casual "barbecue" short. By 1985, the venture was so successful he gave up his day job at Dome and devoted himself to a full-time career in sportswear.

Eventually, he brought in business partners and grew Westbeach—a surf, skate and snowboard clothing company—to eight Canadian locations with more than 1,000 distribution partners, before selling it to Morrow Snowboards Inc. in 1997 for $15 million. But despite its apparent success, the business was not without its troubles.

"Westbeach never made any money," Wilson acknowledges in a recent interview on his way to his favourite workout spot: Grouse Mountain, in North Vancouver, where he does a 2.9-kilometre uphill hike (known locally as the Grouse Grind) in an impressive 50 to 55 minutes.

The problem was that the company began concentrating on an unprofitable wholesaling operation, which was plagued by payment and distribution delays, rather than on its higher-margin retail sales, which saw clothes fly out of the stores faster. But Wilson also found the business personally frustrating—in particular, the resistance he says he met trying to push for more women's apparel.

"It was time for me to get out and reinvent, so I took all the good things out of Westbeach, threw out all the bad stuff and started Lululemon," Wilson says matter-of-factly while sitting in the passenger seat of his Cadillac Escalade—driven by his assistant, a 20-something former ballet dancer whose job description includes tackling the Grind with her boss.

As the story goes, Wilson went to his first yoga class in 1997 and discovered not just the benefits of relaxing the mind while working the body, but a motley array of inferior clothing he was certain he could make better. But the truth is, he had been looking for a way to fit the underserved female athletic apparel market long before that first class.

The women he knew, including a former girlfriend who was a nationally ranked track-and-field athlete, couldn't find the right clothing in which to sweat. His girlfriend was fashionable off the track, Wilson recalls, but it was another story once she put on a pair of shorts. "She dressed terribly, wore dumbed-down men's stuff," Wilson recalls.

He had also noticed statistics showing that, during the 1990s, more than half of university graduates were women, compared to 20% when he was an economics student at the University of Calgary in the 1970s. It was that economics degree that helped him appreciate the correlation between the rising popularity of yoga and the growing power of female consumers, which eventually led him to realize just how profitable a women's line of athletic clothing could potentially be.

Wilson started Lululemon in 1998, aiming his products at affluent, educated 30-year-old-plus women. Some of its original styles, including the flattering "crop-slit boogie" pant and Y-back tank top, offered in a multitude of colours, are still classics today. To prepare for the opening of the first location, a West Vancouver design studio that became a yoga centre at night, Wilson ordered 500 of each style. The project was very capital intensive, as start-ups often turn out to be.

"I bet my whole life on it, basically," says the father of five boys, whose ages now range from two to 19, from two marriages. As the company website tells it, "clothing was offered for sale and an underground yoga clothing movement was born."

He launched his first stand-alone store in Vancouver's Kitsilano neighbourhood in 2000, setting it up as a community hub that offered yoga enthusiasts a venue to meet and learn about everything from the physical aspects of healthy living to "the mental aspects of living a powerful life of possibilities," according to the corporate website. Sales of the store's trendy workout wear soon overshadowed the educational mandate, and the company began focusing exclusively on its retail activities, while gradually expanding. Lululemon's second store opened on Toronto's trendy Queen Street West two years later, and, in 2003, it landed its first U.S. location, in Santa Monica, California. Soon its trademark clothes and accessories were turning up in the fashion pages of local, national and international newspapers and magazines, and word began to spread. Women everywhere were talking about the styles and different colours that could be found in workout pants—not to mention how flattering the clothing looked both in and out of the gym. By 2004, with a dozen locations in Canada and plans to open two more shops in California, Lululemon announced it was opening stores in Japan and Australia.

At the same time, Wilson was starting to develop his vision to expand the chain to a couple of hundred stores. Realizing he couldn't tackle this dream alone, he went searching for partners. In December, 2005, after opening 33 stores, he found some contacts that seemed to be the right fit: A group of investors led by private equity firm Advent International Corp. and venture capital company Highland Capital Partners, both of Boston, bought a 48% stake in Lululemon (their share has been diluted to 33% since the IPO). Advent put down a reported $80 million, while Highland dropped $20 million.

Tom Stemberg, a partner at Highland Capital as well as a co-founder and former CEO of Staples, was looking for a retail investment and, based on a tip from an associate, decided on Lululemon after visiting a location in Toronto. "I got to the store and it's like an Arab marketplace on a Saturday," Stemberg, who now sits on the Lululemon board, told The Boston Globe. He set up a meeting with Wilson soon after, and says the deal happened "way faster than any of us had imagined."

From his third-floor office, Lululemon CEO Robert Meers, who at 64 is twice the age of many of his staff, acknowledges that his career in retail hasn't always been with companies on the upswing. But with age comes experience, and as the broad-shouldered executive (a former National Football League player who can sometimes be spotted at yoga classes) leads Lululemon through the expansion ahead, he can draw from lessons learned during his time as head of Reebok. Meers, who assumed the position of CEO after the Advent group took a stake in the company, helped grow the Reebok brand during the 1980s aerobics craze. Using local fitness celebrities to promote Reebok products in their respective markets, Meers drove North American sales from $13 million to $1.2 billion (U.S.) over four years, and then went on to build such brands as Rockport, Avia and Greg Norman. Those were the good times. But he also oversaw Reebok during tough times, and was CEO from 1996 to 1999, a period when its sales fell and the company lost significant market share to Nike, which was scooping up many of the female customers that had once been drawn to Reebok. "[Reebok] got sucked into the traditional sports business focused on young male athletes," he says. "I was part of that decision, and it was commercially successful, and yet really not taking full advantage of what put Reebok on the map."

At Lululemon, Meers's job is to keep the chain from tripping up in its expansion, while Wilson assumes the role of chairman and chief product designer. Wilson says he wanted Meers not just for his experience with Reebok, a global brand, but for his Rolodex—a useful tool to help Lululemon open stores in locations in the finicky U.S. retail landscape. "One thing I have learned is that there are different buying patterns and cultures in each city. I don't think you can say the U.S. is different. What can be said is the northeast is much different from the southwest U.S.," Wilson told the Associated Press, calling his new CEO "the greatest thing since sliced bread."

Highland Capital's Stemberg credits Wilson for knowing when to call in reinforcements. "Fortunately, Chip Wilson knew that to take it to the next level, he shouldn't be the CEO. Not every company founder understands that."

Analysts consider Meers a good choice: Mark Rosen of Toronto-based Accountability Research calls the executive's Reebok experience "invaluable." As for his impact so far, Rosen points out that the company now has a market capitalization of about $3 billion. But as he dives into the U.S. expansion, Meers is already being put to the test in dealing with Lululemon's first hurdle: The company can't keep some of its basic styles in stock. One Wall Street analyst complained during the second-quarter conference call of not being able to find running gear in her size on the day of a half-marathon in Chicago. Another had the same problem in New York.

While Meers admits that selling out of product is a nice problem to have, shelves that lack core items are bad for business in the long term. "It's inexcusable if we continue to not stay in stock on key sizes on standard items," he says. "That is a business fix that we absolutely have to make."

Plans for improvement include a new inventory system the company is putting in place early in 2008 that will give it real-time data on what sizes, colours and styles it needs to replenish at particular stores. As well, Meers says Lululemon is expanding its manufacturing facilities to include a plant in Los Angeles, complementing its other "qualified socially, economically and quality-wise" factories in such countries as Israel, China, Taiwan and Indonesia.

As for the growth strategy, for now, the focus is the U.S., says Meers. "I don't want to move into France, for example, and not do well in the United States. I believe we can get the supply chain and management training really buttoned down by the last half of '08, and that's when we start entering Europe and Asia in a bigger way."

What's remarkable to many about Lululemon's growth to date is that it happened with almost no advertising. With the exception of placements in Yoga Journal and local newspaper ads to announce store openings, the company has relied entirely on grassroots, or viral, marketing to spread the word.

One of Lululemon's most memorable stunts was its store opening in downtown Vancouver in October, 2002, when it offered a free outfit to the first 30 people who showed up naked. The media coverage was widespread and eventually landed Lululemon a spot on CNN. In the fall of 2006, the chain poked fun at itself by spray-painting "sell-out," "cult" and other graffiti on one of its storefront windows, again garnering press mentions.

But the company doesn't always go to such elaborate lengths to get noticed in local markets. Most new store openings begin with a quiet word-of-mouth campaign that begins six to nine months ahead of time. Lululemon identifies notable local athletes and fitness instructors, and recruits them as "ambassadors" to flaunt samples of the product.

Prior to the opening of the chain's Las Vegas location, scheduled for December, 2007, local representatives held a "kitchen party" in the home of a popular fashion blogger and offered guests the opportunity to try on some of the clothes. Pictures of the event, and of the clothing, were then posted on the site three months ahead of the store's grand opening, generating a lot of local buzz.

Lululemon spokeswoman Sara Gardiner says that while big-name celebrities wear the clothes, the company shies away from using them to sell their stuff. "They are influencers, but we don't seek them out," she says. "It's not authentic. We don't want to take our eye off the community game. It's a completely different way of marketing—it's much more passionate and real."

What's more, grassroots marketing is cheaper than traditional advertising. The company says it will spend between 2% and 4% of sales on marketing, compared to an industry average of approximately 11% to 14%.

Once the seed is planted and before the store opens, Lululemon ensures its employees are also ready to spread the message. Staff members are required to take a 38-hour training course before they can become "educators" on the shop floor. The training includes information on the company's products and their high-performance technical aspects, from seaweed compounds and silver in the fabrics to moisture wicking, as well as an introduction to the corporate philosophy. Among other things, this involves listening to eight-hour-long self-help audiotapes featuring Brian Tracy, a Canadian-born lecturer on leadership, sales and business strategy—a personal favourite of Wilson's. Everyone who works at head office, including Meers and Wilson, is also asked to spend a few hours each week at a retail store. The arrangement offers a rare opportunity for corporate employees and executives to hear consumer feedback directly: During one of Wilson's shifts at a Vancouver store, a customer complained (without realizing who she was talking to) about the location of the Lululemon logo on the back of the leg of a pair of pants, saying her daughters preferred the logo on the waistband. Since then, the company has switched some logos to that location.

Lululemon has been criticized for the way it indoctrinates its staff, who are encouraged after a year with the company to take a personal development course known as the Landmark Forum, paid for by the company. Wilson says the courses aren't a requirement, "but we sure understand how powerful it is when people do, and how it sets a common culture. You don't have to do it, but if you don't, then you almost end up weeding yourself out."

This spiritual backbone may seem a bit touchy-feely for some, but stock watchers say it's part of the corporate culture that makes the brand unique. "While everything from the free yoga classes, seaweed-infused fabrics, personal goal-setting, community get-togethers and talk of the Law of Attraction may seem of questionable significance to some, a single number should erase all doubt: $1,400 per square foot, which is the average sales for Lululemon stores open at least a year," says Rosen of Accountability Research. By comparison, the median sales-per-square-foot figure for 17 chains, ranging from Coach and the Gap to Urban Outfitters, was $487 (U.S.) in 2006, as documented in a report by Credit Suisse.

Laura Wallace, a managing director with Toronto-based portfolio manager Coleford Investment Management, says the emphasis on corporate culture is a strategy that's used by market leaders such as Wal-Mart. "I think you see many successful companies have very strong cultures. The challenge is to be able to maintain the strength of your culture as you grow."

For Wallace and other analysts, the big question mark hanging over Lululemon is whether it can make it south of the border, where other Canadian companies, such as Canadian Tire and La Senza, have failed, and Tim Hortons continues to struggle. The chain's competition in the U.S. includes Nike, Under Armour Inc., a sportswear brand that went public in 2005, and Lucy, a yoga and accessory chain recently bought by VF Corp., as well as fitness lines started by well-known retailers Victoria's Secret and American Eagle Outfitters.

Because Canada and the United States are similar culturally, "we think the markets are the same, but they're not," Wallace says. "The U.S. is much more competitive, in part because it is the most successful. They consume like nobody's business. Plus, they have short attention spans, which means it's difficult, if you are a fad, to maintain the consumer's attention."

Becoming a fad is one of the threats some analysts cite as Lululemon's potential downfall in the years to come, along with increasing competition, a possible downturn in the U.S. economy and simple missteps in opening stores in the U.S. "To say that Lululemon's expansion to the U.S. is paramount to its success would be an understatement," says New York retail analyst Paul Lejuez of Credit Suisse.

Other analysts are simply cautious about the stock. In October, while Under Armour was trading at about 48 times anticipated earnings for the year, Lululemon was surging beyond expectations at multiples of between 125 and 145 (the share price had dropped by early November, however, and was trading near $40).

Other analysts have also balked at the high price, and are watching from the sidelines. Most of the shares are reportedly held by U.S. investors who are clients of U.S.-based Goldman Sachs Group Inc. and Merrill Lynch & Co., which Lululemon hired as lead underwriters of the offering.

Back in the Cadillac at the bottom of the Grind, the sweat long dried from his moisture-wicking T-shirt, an invigorated Wilson hangs up from a conference call on his BlackBerry and dismisses the hype surrounding the stock. His job is to run the best company, he says. "Wall Street will create huge ups and down in our stock, and they'll play the game, but my game is the long run. I don't get wrapped up in it."

For now, Wilson is savouring the moment and moving forward fast—like someone who believes in Lululemon's corporate manifesto.

ADVENTURES IN U.S. RETAILING
For Canadian chains aiming to grow, establishing a presence south of the border often seems a logical next step. But expansion into the U.S. market can be tougher than many anticipate.

Aldo's sure step
The Montreal-based shoe company is one of the few true U.S.-expansion success stories in the history of Canadian retail. Since opening its first store in Boston in 1993, Aldo has grown its U.S. base to more than 380 outlets and parlayed that success into international growth (the company now operates in more than 30 countries around the world, including China, India, Israel, Russia, Ireland, South Africa and Venezuela). By expanding regionally—beginning in the northeastern U.S.—the chain was able to learn as it went and build stores where its experience in the market indicated the brand would be accepted.

A central goal was to appeal to the specific tastes of the markets it moved into—high-fashion footwear for urban centres and Quebeckers, who tend to be more style-conscious, and less-trendy product outlines for lower-end malls and rural communities.

"They did their homework," says Maureen Atkinson, a senior partner at Toronto-based J.C. Williams Group, "and they did a thoughtful kind of expansion where they really became important in a market, and then moved to the next."

Shoppers Drug Mart's bitter pill
Canada's largest pharmacy chain already had nearly 40 franchise stores in Florida when, in 1984, then-parent company Imasco Ltd. pushed forward on a major U.S. expansion by purchasing the Virginia-based chain Peoples Drug Stores Inc. The move to acquire the Peoples brand and its nearly 800 company-owned stores spanning 14 states was expected to bolster Shoppers' presence in the U.S., since the Peoples pharmacies enjoyed solid local market shares of up to 50%. But things did not go according to plan.

Over the next two years, Shoppers found itself watching helplessly as Peoples wound up on the losing end of a heated discount-drug war against its larger American competitors, says Wendy Evans, a Toronto-based retail consultant with Evans & Co. Consultants Inc. "They found the competition to be so strong in the States, there were four drugstores on every block, practically, versus what is far less competition in the Canadian market."

In an attempt to turn the tide and stop the bleeding, Shoppers executives began chopping expenses, dumping more than 300 locations in areas where they couldn't make up market share. Although the chain began to turn things around by 1989, Imasco gave up on its U.S. venture and sold off the remaining outlets. Fearing further ill side-effects, Shoppers has not ventured south since.

Canadian Tire goes flat—twice
For Toronto-based Canadian Tire, the road to the U.S. retail market has been marked with potholes. In 1982, the company scooped up the ailing home and auto supply chain White Stores Inc., based in Wichita Falls, Texas, but failed to turn the brand around. By the time Canadian Tire sold off the assets in 1986, the company's U.S. experiment had racked up about $250 million in losses.

"I think Canadian Tire thought they were doing well and they could bring their know-how to [White]," says Maureen Atkinson of J.C. Williams Group. "But obviously they really didn't understand the market."

In 1991, Canadian Tire ventured south again, this time launching an auto parts and service chain called Auto Source Inc. in Ohio, Indiana and Kentucky. But the company was again unable to compete in the cutthroat U.S. market, and Canadian Tire eventually mothballed the chain in 1994 after losing more than $60 million. —Matt Hartley