Lululemon Athletica (NASDAQ:LULU) is in a position to emerge from the COVID-19 crisis stronger than before. It navigated the store closures extremely well over the last few months thanks to investments in the direct-to-consumer business, including e-commerce sales.

While revenue for the fiscal first quarter fell 17% year over year, it could have been far worse. E-commerce comparable sales jumped 70% over the year-ago period. Online sales made up less than a third of its revenue last year, but comprised 54% of Lululemon's revenue in the most recent quarter. 

Lululemon's digital platform has enjoyed tremendous growth in recent years, but this performance is beyond impressive. Here's what management had to say.

A group of young women practicing yoga in athleisure attire.

Image source: Getty Images.

Lululemon's sophisticated online operation

In recent weeks, we've seen order volumes equivalent to what we experienced during the holiday season in December. 

-- CEO Calvin McDonald

Lululemon has spent the last few years investing heavily in its online business. "We have been investing in our sites in our mobile app for the last several quarters to enhance the guest experience," McDonald said. "These investments have improved functionality, including checkout, navigation, search browse, and the speed of our sites, and I'm thrilled to see how well these strategic investments are paying off."

During the recent quarter, growth was even more impressive overseas, with Europe's digital comp sales up 170% in the quarter and Australia's up 150%. In total, Lululemon's digital comp sales accelerated to 125% in April.

What's most amazing about this stellar online demand is that Lululemon was able to fulfill it. Other apparel stores with a less sophisticated digital operation would have been swamped to the point of not being able to fulfill all the orders. That's what happened to American Eagle Outfitters, which experienced a 33% surge in digital orders but only reported a 9% increase in digital revenue in the recent quarter. 

Lululemon demonstrated that its digital business is second to none. "We recently implemented intelligent sourcing capabilities that use machine learning and artificial intelligence to route e-commerce orders through our distribution network in the most efficient way," McDonald said. 

The benefits of these efforts, as McDonald explained, were "increased delivery speed to guests, minimizing costs, and efficiently utilizing inventory pools to help reduce markdowns."

Strong response to new product styles

When looking more closely at our e-commerce business, guests continued to respond to the newness we introduced into our assortments. 

-- McDonald

More people are working and exercising from home. Lululemon was prepared for that with several new products, including new styles with its Everlux fabric. These offerings contributed to a strong customer response for Wunder Train and Invigorate bottoms, in addition to other yoga products. 

"Midway through the quarter, as our guests began adjusting to working and sweating from home, we saw a significant increase in demand for our yoga products, including our Align bottoms, yoga mats, and blocks," Chief Product Officer Sun Choe said. 

What's more, Lululemon gained new ideas during the quarter for new products. It identified new opportunities in the men's category to introduce new train products similar to the way it did with the women's category last quarter. Additionally, Lululemon will be expanding its On The Move category for women later this summer with three new pant styles for out-of-studio use. 

Key takeaways

While overall sales were down, the surge in digital sales shows that the brand continues to be red-hot. Lululemon may see a permanent and significant boost in the sales mix between physical stores and online, even as stores reopen. During the call, McDonald said that the company has "much to celebrate, including seeing retail-only guests beginning to transact with us online and transition toward becoming an even more loyal omni guest." 

This could be very beneficial to profitability, since Lululemon's direct-to-consumer business generates an operating margin of more than 40%, much higher than sales made through physical stores. Lululemon managed to report a small profit last quarter, despite the drop in sales. 

Moreover, it's an advantage for Lululemon in this retail environment that it's fundamentally in the business of selling functional and comfortable activewear, not fashion.

"It is clear to me that the desire to wear technical apparel that also offers comfort is here to stay," Choe said. "We do not believe that guests will be willing to forego either one of these attributes even as they return to their normal lives over the coming months." 

 

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