Lululemon Athletica is at a turning point.
It's been two years since the active-wear company brought in Laurent Potdevin as chief executive officer. His task: cut the waste and expense of designing, making and distributing its garments, and rebuild customer trust after the 2013 recall of $98 yoga pants that became sheer when the wearer bent over.
Now Potdevin is staking the company's future on innovation, including pants that make women feel naked when they wear them.
The CEO is looking to improve profit margins while beating back growing competition in a niche market where clothing trends may be turning against Lululemon. Potdevin's goal is to cement the retailer's reputation as the top-quality athletic-apparel maker, justifying its higher prices, and change its perception to a brand worn by top athletes as well as wealthy women saluting the sun in metropolitan yoga studios.
"Everyone's got a magic number for what they're willing to pay for quality," said Bridget Weishaar, a Chicago-based analyst with Morningstar Inc. "It's not like your option is Lululemon or Old Navy. You can trade down just a very little bit and still get a really good product."
Athleisure may be a fad, but customers' focus on health and mindfulness won't change.
The growth of the athleisure -- workout clothes worn on the street -- expanded the market for companies such as Lululemon, Weishaar said. When shoppers go back to wearing denim and blazers, Lululemon could be left with fewer customers willing to fill their closets with expensive workout gear.
Potdevin doesn't seem worried. Sales at stores open at least a year and online have grown in the last five quarters.
Athleisure may be a fad, but customers' focus on health and mindfulness won't change, he said in an interview on Lululemon's Vancouver campus, where conference rooms are named for ski ranges and yoga styles. Potdevin said he meditates twice a day.
Lululemon argues that competition from heavy hitters such as Nike Inc. and Under Armour Inc., as well as athleisure upstarts Express Inc. and Urban Outfitters Inc., will drive consumers to seek better quality and lead them to Lululemon. But making clothes for serious athletes is challenging, said Camilo Lyon, a New York-based analyst for Canaccord Genuity Inc.
"That's a tough game to play," he said. And it's hard to tell how much more they can charge, Lyon said. "They've already got premium pricing in the market."
Potdevin said the company isn't trying to compete on price. "It's about getting involved n more categories across men and women," he said. "It's about solving problems for the athlete."
Gross margins in the three months that ended November 1 were down 6.9 per cent from the same period a year earlier, according to data compiled by Bloomberg.
When Potdevin took over, Lululemon's supply chain needed fixing. Quality checks made its process slow and expensive. New products resulted in wasted fabric. To get clothes to shelves faster, more than 40 per cent of its items were shipped to distribution centers by air, which is about four times as costly as shipping by sea. That had to stop, Chief Financial Officer Stuart Haselden said.
Now the focus is on innovation, Potdevin said. Whitespace, the company's research-and-development center, has tested apparel in extreme environments in Alaska and has a lab on the Vancouver campus that can replicate different climates. The company invested in a team of 35 people who work as long as five years on new designs and measuring factors such as sweat and laundering.
Whitespace helped conceive the new pants whose buttery soft fabric mimics the feeling of being naked. Customer response has been strong -- same-store sales of women's bottoms grew 27 per cent last quarter from the same period a year earlier.
Lululemon employs Noble Biomaterials's X-Static technology, which uses the natural antimicrobial properties of silver to stop garments from smelling bad after a workout. But the company's competitors can do that, too, and do it cheaper. An "anti-stink" tank top at Lululemon costs $48, while Athleta's version of an "unstinkable" tank costs $44 and is often on sale for half that.
Initiatives that are driving sales but have slimmer profit margins are being put on hold. The company's children's brand, Ivivva, is a hit among middle-school girls in New York City, according to Haselden, who has daughters aged 10 and 8 and recently moved from the city to Vancouver. But kids' clothing is made with the same technical fabrics as adult gear and is sold at lower prices, so the company will be slowing Ivivva store openings until it's certain it has the model just right, he said.
To avoid future abandonment by trendy adult customers migrating to the next big thing, the retailer has focused on athletes, mainly its brand ambassadors who work with the company to develop and design products and wear them to events. The company will outfit the Canadian men's and women's national beach-volleyball teams for the 2016 Olympics in Brazil.
Haselden said, "I'm excited for us to play offense again."