Providing consumers with a full omnichannel shopping experience is table stakes these days in order to successfully compete in the retail sector. Offering the convenience to physically visit a store or order online for either pick-up or delivery can not only increase spending, but it can drive loyalty from customers as well.
Two top apparel businesses that are thriving at creating a seamless omnichannel experience are Lululemon (LULU 1.24%) and Nike (NKE -0.28%). But the former has been leading the latter in one important area: e-commerce sales. And this has its advantages.
Let's take a closer look at what Lululemon, whose stock is down 20% in 2022, is doing right.
Image source: Getty Images.
Lululemon generates more direct-to-consumer sales
Direct-to-consumer (DTC) sales for Lululemon represent all orders taken via the company's website and mobile app. In the most recent quarter (ended Oct. 31), DTC revenue accounted for 40.4% of the overall business. In its latest fiscal quarter (ended Feb. 28), Nike generated 26% of sales via its digital channels. That number was roughly 33% in North America.
During the depths of the coronavirus pandemic, in the May-July period of 2020, an incredible 61.4% of Lululemon's revenue came from e-commerce, demonstrating the flexibility inherent in the business model at a time when physical shopping was restricted.
Around that same time, Nike's digital channel brought in 30% of its overall business, a number that seems low given temporary store closures. Nike's management team believes that digital sales will account for half of the business in the next few years, a figure Lululemon was already able to eclipse.
Why is this beneficial for Lululemon?
Having a larger share of sales come from the DTC channel has some advantages, and it hinges on being able to cut out the middleman.
Because it doesn't give economics to third-party retailers, Lululemon has a better financial profile than Nike. Over the trailing-12-month period, Nike's gross margin of 46.3% and operating margin of 15.8% both trailed Lululemon's gross margin of 57.8% and operating margin of 21.3%. In an inflationary environment, like the one we're currently in, Lululemon has more wiggle room to absorb higher input costs.
Since Lululemon pushes all of its merchandise primarily through its network of 552 worldwide company-owned stores, it has a tighter grip on inventory levels. This situation allows the business to avoid costly markdowns to get rid of excess product, which can be detrimental to the brand.
Finally, Lululemon is able to own the entire relationship with its customers. This means driving loyalty and engagement directly and having access to all the shopping data that comes with it. Having this valuable information in-house can help inform marketing efforts, product introductions, and pricing strategy.
Nike is realizing the benefits of focusing more on going direct to consumer. "Over the past four years, we have reduced the number of wholesale accounts worldwide by more than 50 percent," Matt Friend, Nike's CFO, mentioned on the latest earnings call. The company wants to prioritize maintaining its brand strength.
There is, however, one negative impact of having more DTC business. And that is the lost incremental sales that Lululemon might be able to generate if it had more wholesale partners. But based on the business's monster success over the past decade, with quarterly revenue rising more than six-fold, I think management knows what they're doing.
Shareholders should expect continued DTC strength when Lululemon reports fiscal 2021 fourth-quarter and full-year financial results on Tuesday, March 29.
