Lululemon athletica's (NASDAQ:LULU) extended downward dog might finally be turning up. Shares jumped as much as 10% and finished up 5% after its most recent quarterly report, despite weak guidance, as investors were encouraged by management's debrief on the quarter.
Indeed, there was a plenty of good news in the fiscal fourth-quarter report. Same-store sales were positive for the first time this year as comps in its core women's segment rose, with its women's bottoms comps growing in the high teens. Meanwhile, comparable sales for its ivivva line for girls jumped 51%, and, perhaps most importantly, comparable sales in menswear spiked by 16%.
Though Lululemon is and has always been primarily a women's brand, that business has suffered in recent years due to self-inflicted wounds including a product recall and offensive comments from founder Chip Wilson, as well as increasing competition from a host of apparel makers including Nike, Under Armour, and now Victoria's Secret. Investors were also not pleased with the surprise resignation of respected CEO Christine Day in 2013. The Vancouver, B.C.-based company was a pioneer of the "athleisure" trend that has swept the fashion world, and its success has attracted competition. As the women's field has grown crowded, earnings have turned flat, leaving menswear as perhaps Lululemon's most promising growth path.
The ABC men have been waiting for
CEO Laurent Potdevin touted the success of the pants category, particularly the core ABC pants. The ABC, which stands for anti-ball-crushing, is a new kind of pant, and, like the $98 yoga pants it sells for women, this could be Lululemon's latest invention of a clothing category you didn't know you needed. The company describes the pants as having a wide-paneled gusset and four-way stretch Warpstreme with anti-ball-crushing engineering that "gives you and the family jewels room to breathe."
Not all of the reviewers on Lululemon's website loved the pants, but those who did raved about them in a way men rarely do about garments. "Never have I felt so good," said one buyer. "Absolutely fantastic," said another. Others added, "I love these pants," and, "Truth is I would buy more of these pants except then people at work would think I only owned 5 pairs of one kind of pants in different colours."
The pants have attracted much press attention and seem to be generating some much-needed positive buzz for the company. Men represent a new, untapped market for Lululemon, and many are still unfamiliar with the brand, giving the company the ability to redefine itself. The ABC pants might be the best signal it can give that Lululemon understands men's needs in a way that no other company has demonstrated. With a $128 price tag, these pants should make investors happy as well.
Lululemon opened its first men's-only store in Manhattan's SoHo neighborhood last November, furthering its goal of gaining a foothold in the men's market. Potdevin also indicated on the retailer's recent earnings call that a major component of the company's strategy is increasing store size to accommodate a greater selection of men's clothing. As an example, he said the company remodeled a location in Vancouver to increase the size by 50%, which led to a 50% increase in overall sales and a 90% jump in men's sales in just six months. Potdevin said he expects a similar boost from store remodels to come.
Potdevin warned that those investments would weigh on profits in the near future, but if the company can build the men's business to anything close to the women's side then they will certainly have paid off.
With the buzz coming from the ABC pants and the positive sales momentum from menswear, that category could finally get the stock out of its two-year slump. Keep an eye on Lululemon's performance in that segment over the coming quarters. If men's sales continue to climb, the stock should return to its former heights.