Recently, Lululemon released its performance report for the third quarter of the 2023 fiscal year. In the three months ending October 29th, its sales increased by 19% year-on-year to $2.2 billion, its overall gross profit margin increased to 57%, and its net profit decreased by 2.6% to $249 million.
From a regional perspective, the Chinese market can be said to be unparalleled. In the third quarter, Lululemon's revenue in China was approximately $270 million, a year-on-year increase of 53%, continuing to lead the world. In terms of channels, DTC (direct to consumers) channels, which account for 41% of total net revenue, saw a year-on-year growth of 18%. By category, women's clothing revenue increased by 19% compared to last year, men's clothing increased by 15%, and accessories increased by 29%.
For the fourth quarter, Lululemon is expected to have a net income of $3.135 billion to $317 billion and an expected earnings per share of $4.85-4.93, which is lower than market expectations. Meghan Frank, the company's CFO, stated during a earnings conference call that as the fourth quarter approaches, Lululemon will "focus on the macroeconomic environment" and will be more cautious in providing performance guidance.
This yoga pants brand, which has become popular in social media without realizing it, surprisingly falls below market expectations in a rare way?
Middle class harvester
Although there have been frequent calls for "consumption downgrades" in recent years, for the middle class, there are not a few yoga pants to buy.
In July 2022, Lululemon's market value surpassed Adidas, becoming the world's second largest sportswear group after Nike in the yoga apparel category alone. Breaking through the $40 billion mark, Adidas took 68 years, Nike took 46 years, and Lululemon only took 22 years.
Looking back at Lululemon's transcripts over the past few years, its increasing annual revenue has made it stand out in the industry. 29.6% in 2022, 42.1% in 2021, 10.6% in 2020, 21.0% in 2019, 24.1% in 2018... Even in the cold winter of the industry, it can maintain a certain level of growth rate.
All of this is closely related to the middle class, the primary target market and consumer group.
After the epidemic, the non essential consumption of high-end luxury goods by the middle class has shrunk. With both financial and power compressed, this consumer group is more inclined to strengthen their taste. Compared to the traditional high-end positioning of luxury brands, Lululemon has entered the ranks of "new" luxury goods with a more reasonable average price of 1000 yuan, successfully promoted to "Herm è s in the sports industry".
Prior to this, Lululemon had already positioned its audience as "Super Girls" who yearned for a positive life and realized their self-worth, avoiding the three major categories of balls. It was skilled in cutting and selecting materials, successfully breaking through in the 20th century dominated by sports giants such as Nike, Adidas, and PUMA, and continues to create new ideas today.
Brand founder Chip Wilson once described the target audience as "young, educated, employed, possibly unmarried or married, energetic and health conscious." While filling the gap in the women's category in sportswear, Lululemon also built an exclusive community through a new marketing concept. On the domestic Xiaohongshu platform, the # lululemon # topic has a high browsing volume of 1.48 billion times, and under the # Today Wearing Lululemon # topic, about 25000 grass planting and evaluation notes have emerged.
In offline marketing, brands will invite well-known fitness bloggers to their stores for live streaming and hold various community activities. In the past October, the one week "Good State Art Activity Corridor" held more than 30 community activities in Xuhui Binjiang, Shanghai, attracting nearly 5000 offline participants.
Not long ago, Lululemon's first men's clothing pop-up space in mainland China officially opened on the first floor of Shanghai Hongqiao Tiandi, which is also a new attempt for the brand after relying on "Super Girls" to make a name for itself - to win the wallet of middle-class men.
Ambition, Storm, and Challenge
After the release of the third quarter report, it seems to be in line with the rhythm of the earlier layout of men's clothing flash. Calvin McDonald, CEO of Lululemon, announced at the performance meeting that the company is preparing to launch men's shoes in the first quarter of 2024.
Footwear products are almost the most important category for all sports brands, taking Nike as an example, with over 60% of its revenue coming from footwear. This undoubtedly rings the alarm for sports industry giants, and more intense competition is on the verge of emerging. Prior to this, there have been several patent technology lawsuits between Nike and Lululemon.
Since its first announcement of entering the footwear market in 2019, Lululemon's women's shoes were launched in early 2022. The launch of its men's shoes this time directly challenges industry giants such as Nike, Adidas, Under Armour, and has great ambitions.
Faced with step-by-step pressure, industry giants are naturally not willing to be outdone, especially in the layout of Lululemon Yoga's main business. Currently, the brand is facing competition in the high, medium, and low-end markets.
In 2019, Nike launched a yoga product line, while Adidas invited Lululemon's former CEO as its women's business strategy consultant in 2021 to launch products such as women's sports bras and yoga pants. At present, both brands have launched yoga pants in different price ranges. Although their professionalism is slightly inferior, they cover the needs of different purchasing levels of low, medium, and high.
In the Chinese market, the yoga pants of domestic sports brand Li Ning are generally priced below 400 yuan, with a focus on cost-effectiveness. In 2022, Feile also launched a fitness yoga series, with yoga pants priced between 339 yuan and 519 yuan, and yoga vests priced between 199 yuan and 399 yuan. Another outdoor brand under ANTA Group, Dysante, also started selling yoga clothing products this year, priced between 790 yuan and 1990 yuan. The newly acquired Maia Active under ANTA has long been known for its design system that is suitable for Asian women, and the two brands have become strong competitors for Lululemon in the high-end and cost-effectiveness tracks, respectively.
Currently, Lululemon's short-term challenge also comes from an uneconomical deal - the fitness mirror brand Mirror, which was acquired for $500 million in 2020. In the third quarter of this year, Lululemon incurred approximately $74.5 million in expenses due to impairment of Mirror assets and other factors. This is also an important reason for the company's 2.6 percentage point year-on-year decline in net profit during the quarter, despite revenue growth.
Along with this comes the challenge of leveling up the storm. In the women's sports and yoga apparel track, Lululemon's "flat replacement" brand has long been like a fish in a river. According to e-commerce analysis firm Jungle Scout, CRZ Yoga, as a replacement for Lululemon, has a booming business in North America, selling over 80000 yoga pants per month and generating approximately $2.84 million in revenue.
In the rapidly rising Chinese market, there is a trend of "grading" middle-class consumption, and some people will pay more attention to cost-effectiveness and tend to look for alternatives - Maia Active's sales of over 500 million yuan in 2022 have become evidence, and the effectiveness of Lululemon's sinking in non first tier cities in China in the future still needs to be considered.
In addition to assessing the current situation, lowering performance guidelines is likely also a step for Lululemon to maintain its momentum of surpassing in the next quarter.