Dive Brief:
- Lululemon and Chip Wilson may have settled their proxy fight, but the brand cited a wave of negative media coverage as one of the key culprits for continuing poor trends.
- CFO and interim co-CEO Meghan Frank said Thursday that “spikes of negative commentary” in the news and on social channels dented both traffic and top-line sales going into Q2. In addition, the athletics retailer said some of its product launches moving into the second quarter did not meet expectations.
- As a result, the retailer cut its fiscal guidance from a potential 2% to 4% revenue gain to an expectation of flat or declining revenue. Revenue in Q1 was up 4% overall, to $2.5 billion, but declined 3% in the Americas.
Dive Insight:
Despite touting “encouraging signs” in Q1, executives on Thursday focused mostly on the negative trends Lululemon saw towards the end of the quarter and into Q2.
Bad press, including from Wilson’s protracted campaign against the brand, hurt traffic mostly in the U.S. and China, according to Frank. Another source was a probe by Texas Attorney General Ken Paxton into the brand’s alleged use of forever chemicals in its products.
In response, Frank said Lululemon is increasing its marketing spend to reset the narrative and investing in community activations to reconnect with customers.
“These stories have died down and subsided, but we have not yet seen a return to our pre-disruption, I’d say, trends,” Frank said.
The other principal factor driving concerns over Lululemon’s comeback is customer reception to new product launches. The retailer has emphasized the need for newness, aiming to increase new styles to 35% of its assortment, but shoppers are not responding as expected.
This speaks to a more existential issue at Lululemon, which has lost its edge in releasing “interesting, innovative” product, according to GlobalData Managing Director Neil Saunders.
“The product is just not compelling enough to move the sales line above the high ceiling Lululemon has bumped up against,” Saunders said in emailed comments Thursday. “In our view, too much of the range is now repetitive and uninspired and, as a result, a certain generic staleness has crept into the shopping experience.”
Saunders also called attention to “too much non-core junk” in the assortment, which is distracting from core merchandise.
Lululemon has a few irons in the fire to address product challenges. The retailer plans to reduce its product development process to between 12 and 14 months, and has already cut the timeline from 18 to 24 months to 15 to 16 months. Lululemon is also looking to chase demand trends quicker and lean into styles that are performing well in real time.
In North America, Lululemon has also reduced SKUs by 15% in stores, put a sharper focus on merchandising by performance and lifestyle categories, and cut down on markdowns. A smaller subset of stores feature additional changes, including further SKU reductions and more local curation.
“With US guided down double digits tonight, we fear the topline reset is just beginning,” Guggenheim analysts led by Simeon Siegel said in emailed comments. “Though we believe LULU is a strong brand with a loyal customer and among the largest revenue levels of any brand in history, we believe it is simply too large and still likely over-earning.”
Siegel warned that Lululemon’s guidance cut may not have been far enough, as it implies a better second half than the Q2 trends imply.
Another wrinkle is that incoming CEO Heidi O’Neill does not start until September, potentially setting up Lululemon for another transition year ahead.
