Lululemon is on a roll, as its stock has surged more than 75 per cent over the past year.Andrej Ivanov
Calvin McDonald arrives at a Lululemon store in Lower Manhattan dressed head to toe in Lululemon garb, right down to his boxers and socks. An obsessed long-distance runner and triathlete, the chief executive officer of Lululemon Athletica Inc. is on the hunt for some new items for his wife and himself. He picks out a US$298 reversible bomber-style nylon jacket for his wife, Andrea, and some tops for himself, including a US$98 “super soft” T-shirt.
“I’m a bit of a fanatic and a shopper,” he says as he skims through the apparel racks in the minimalist “lab” store – one of only three – which Lululemon uses to test some of its most technically advanced merchandise. “I love the notion of the ‘sweatlife,’" he says – using Lululemon jargon. "It’s what I’ve always lived and what I appreciate about the brand. It performs for me when I’m sweating and it performs for me when I’m not.”
Now, the Canadian-born-and-bred Mr. McDonald, in town for the company’s investor day, intends to put that notion to work at Vancouver-based Lululemon. His vision is to transform the scrappy, fast-growing North American retail star, which put stretchy black pants on the fashion map for women, into a global powerhouse of athletic wear and more for both women and men. He envisages more casual wear, swimsuits, hiking and tennis clothing, underwear, socks, training gloves, headbands, hats and bags. The chain is rolling out cosmetics soon and, eventually, sneakers. After nine months at the helm, he’s betting that branching out beyond women’s yoga gear won’t jeopardize the chain’s recent winning streak.
The store he’s touring on a late April afternoon in many ways reflects the retailer’s wider opportunities. Its cutting-edge items, such as almost-seamless pants made with softer fabrics, in men’s and women’s styles, are designed for athletic and relaxed office wear and often sell at higher prices than the merchandise at its regular outlets. But the products also represent the threat of losing loyal customers, as the company strays from its yoga roots.
“That is a real risk, that they’re going to take away from the core competencies,” says Pamela Danziger, president of retail consultancy Unity Marketing in Stevens, Pa. “To diversify takes a whole lot of energy, a whole lot of resources. … They could really lose focus if they don’t handle that right.”
For now, though, Lululemon is on a roll. Its stock has surged more than 75 per cent to US$173.68 over the past year. Profit for the fiscal year ended Feb. 3, 2019 soared 87 per cent to US$483.8-million from a year earlier, while sales jumped 24 per cent to US$3.3-billion. In the next five years, the company plans to double menswear and e-commerce sales and quadruple international sales.
Analysts are impressed. They estimate Lululemon’s overall sales could almost double to as much as US$6.3-billion by 2023. The retailer’s financial targets are “conservative and easily achievable,” says Camilla Yanushevsky, an analyst at the Center for Financial Research and Analysis of New York.
The retailer withstood a see-through stretchy-black-pant crisis in 2013; seemingly disparaging words about women’s bodies from controversial founder Chip Wilson that same year, followed by his resignation as chairman; and the sudden departure of CEO Laurent Potdevin in February, 2018, who fell short of the company’s standards of conduct, although it was never spelled out what that was. And yet, Lululemon maintains its cult magic. Can it hold on to it as it pushes into menswear, deodorant, office outfits and “performance-based” shoes?
Calvin McDonald, 47, has taken calculated wagers in the past that have paid off.Michael Falco
Mr. McDonald, 47, has taken calculated wagers in the past that have paid off. He spent 17 years at Loblaw Cos. Ltd., the country’s largest retailer, rising through the ranks to executive vice-president. But he left all that in 2011 to become CEO of struggling Sears Canada Inc., which to many seemed to be a no-win situation. In his two years there, he made some progress. He even introduced a line of “athleisure” wear that took inspiration from Lululemon but at much lower prices. “I tried – I did,” he says today. Sears Canada ultimately crumbled, filing for court protection from its creditors in 2017.
At least that CEO experience helped him land the plum job of heading the Americas division of cosmetics retailer Sephora at luxury giant LVMH. By all accounts, Mr. McDonald was a well-respected leader at Sephora, helping it expand its offerings and move into the digital age with mobile-friendly shopping. Over five years, he oversaw double-digit sales growth, he says.
What he learned there can be applied to Lululemon: “How to continue to maintain a nimble, scrappy culture in a business that was getting bigger,” he says. “How to invest in the foundation, how to continue to drive innovation and take risk when the cost of risk is bigger when you’re bigger.”
He and his wife and four children – three sons, now 12, 15 and 18, and a nine-year-old daughter – relocated to San Francisco from Toronto when he took the job at Sephora. They have remained there but plan on moving to Vancouver this summer, when the school year ends.
“Let me tell you, the boys are very happy that dad has left the beauty space and joined a brand that they can wear,” he says. “We go shopping now, and my daughter’s a bit of a tomboy, with three older brothers, so she’s also delighted.
“One of the challenges in our household is figuring out whose is whose because everybody’s wearing it and they’re catching up to me in sizing now. One of the development opportunities, I told the team, is: ‘We’ve got to put a spot for name tags in our clothing because what do we do for Lululemon families? None of those name tags stick to our fabrics.’”
He says a headhunter contacted him in a “typical search” for the Lululemon CEO position; he hadn’t applied for it. “I wasn’t looking to move,” he says. “The family loved our life in the Bay Area. But this is my dream job. I am an athlete. I love retail. I love brand building and for years I had friends who would say to me, ‘What’s next? What would you love to do?’ And I’ve always said, ‘Listen, if I could ever – I love retail and I love sport – if I could ever combine these, that would be my dream job.’ They’d be like, ‘Yeah, but like what?’ I’d be like, ‘Lululemon.’”
Even before Mr. McDonald joined Lululemon, he felt there were shortcomings in its running and other apparel.Andrej Ivanov/The Globe and Mail
Even before Mr. McDonald joined Lululemon, he felt there were shortcomings in its running and other apparel.
“I’m a runner and I couldn’t run in our gear, all of it, head to toe,” he says. “I couldn’t run in our socks, and they’re getting better, and I couldn’t run in our tops. That, to me, is sort of an opportunity.
“My wife plays tennis. She loves our tennis gear, but she couldn’t buy it all year long. Those were two examples of many.”
He is intent on filling the gaps and rounding out the product offerings, especially those tied to running and strength training. The company has introduced a new line of running wear, including split shorts and singlets. Men’s items tout “anti-stink technology,” fewer seams to reduce chafing and mesh for “maximum breathability.” Socks are lighter weight, with terry cushioning. His research found that his customers also participate in tennis, hiking and swimming, so he wants to make clothes for those activities available year round, online or in some stores.
And he wants to beef up Lululemon’s accessories business, from bras and briefs to socks and scrunchies, partly as a way to attract younger consumers with lower-priced items. But the retailer is also introducing some higher-priced items, such as a $598 insulated parka. “It’s not about a brand tax,” he says. “It’s about technical performance.”
When it comes to bras, Lululemon is bolstering its “high support” line after having become known for its strappy back details, which are popular among women who are doing yoga and don’t need much support, said Sun Choe, the retailer’s chief product officer, at investor day. High-support bras tend to yield repeat customers, she said. “At some point in the future, we boldly feel that our bras will be as big as our pants.”
Next month, the chain will launch some cosmetics and personal-care products, such as lip balm, facial moisturizer and deodorant, in 50 stores. Eventually, the plan is for Lululemon to produce “performance-based” shoes and a recent test proved promising. But “not fashion, and nothing imminent," Mr. McDonald says. The pilot entailed selling Athletic Propulsion Labs sneakers, priced from $140 to $200, in most cases allowing shoppers to try on samples of different sizes and hues in stores and have their orders shipped to their homes. That way, the shops don’t lose valuable space stocking numerous shoe boxes.
Still, Lululemon is potentially walking into trouble by expanding into areas in which rivals such as Nike Inc. and Under Armour Inc. already excel, observers say.
“Going up against Nike, which is the 800-pound gorilla in the active-wear market, is going to be a real challenge for Lululemon,” says Ms. Danziger, the retail consultant.
The advent of Lululemon moving into footwear is a concern to analyst Laurent Vasilescu at Macquarie Capital in New York. Shoes generate lower profit margins than what Lululemon is accustomed to, he says. “Under Armour’s undoing in terms of profitability was its efforts to get into footwear.”
Meanwhile, both Nike and Under Armour are taking aim at Lululemon with bigger investments in women’s athletic wear in an already crowded field.
Mr. McDonald says a headhunter contacted him in a 'typical search' for the Lululemon CEO position; he hadn’t applied for it.Michael Falco
Men’s apparel now makes up more than 20 per cent of Lululemon’s sales, but Mr. McDonald envisions it reaching 50 per cent. The problem is, as he readily acknowledges, men currently have little awareness of the brand.
He can barely keep track of the number of times men have looked at him blankly when he tells them he took the top job at Lululemon and that he’s wearing its garments. “Since joining Lululemon, how many of my friends and colleagues that didn’t wear the brand before, they’re like: ‘What did you join?’ … And then I see them a week later at my son’s soccer game and they’re like, ‘Oh my God.’ They’re wearing the Lululemon pants.”
Overall consumer demand for Lululemon-type goods is encouraging, especially among men: While total U.S. men’s and women’s apparel sales declined 1 per cent to US$184.1-billion in the year ended March 31, men’s and women’s active-wear sales increased 8 per cent to US$47.4-billion in that same period, according to researcher NPD Group. What’s more, men’s active-wear sales grew at a faster rate – 9 per cent – than those of women, which grew 6 per cent.
Still, persuading men to embrace the brand will be a tough sell, says Darrell Kopke, who helped launch Lululemon 20 years ago and is now an adjunct professor at the University of British Columbia’s Saunders School of Business.
He says Lululemon stores, with their focus on yoga, are too feminine. Male-oriented brands such as Nike and Under Armour show mannequins that are “6 foot 4 with 18-inch arms,” says Mr. Kopke, who still owns Lululemon shares and has developed his own tailored menswear startup. Lululemon has to fill that “brand credibility gap” among men, he says.
Mr. McDonald is already working on bridging the gap. Last month, his team displayed Lululemon goods at the Boston Marathon, where half the runners are men. “They’re not considering Lululemon for their men’s product," he says. "That’s an example for me where we’re going to show up where he is.”
He says he is looking at boosting Lululemon’s marketing budget, which is now similar to that of other retailers that make their own merchandise – between 2 per cent and 5 per cent of annual sales – and less than half what some other retailers spend.
And in a departure for the company, it will look at using traditional advertising, including television and magazine ads, to raise the brand’s profile among men, he says. The retailer still counts on grassroots word-of-mouth endorsements from “ambassadors” such as local yoga teachers. Now it has started to spend money on celebrities such as U.S. football star Nick Foles.
In Asia, where the retailer launched several years ago as a dual-gender brand – and where consumers are conscious of improving their health and fitness – Lululemon has had no trouble attracting men, says Stuart Haselden, who heads the chain’s international division. “There is just a more robust appetite for, I think, Western brands generally in Asia.”
In North America, fewer than 40 of Lululemon’s 349 stores (it has 440, in all) dedicate almost as much space to men’s merchandise as to women’s; it will take several years to expand existing shops to add more men’s offerings, Mr. McDonald says. Lululemon tried out a men’s-only store in Toronto but closed it last year, opting for a dual-gender model, he says. Instead, he’s gambling on even bigger stores – some of them eight times larger than current ones – to not only showcase the products but also host an array of community events, fitness classes, meditation stations and food bars, to draw more shoppers away from their smartphones. And he’s testing a loyalty program that costs customers as much as US$148 a year in exchange for a free pair of pants or shorts, free expedited shipping and access to fitness classes and other events.
As Mr. McDonald oversees the myriad of initiatives, he takes time to attend a four-day training session in Tucson to prepare for his next triathalon in Hawaii on June 1. During the Ironman training with Olympic coach Barrie Shepley last month, Mr. McDonald tested a pair of Lululemon cycling shorts, a swimsuit and a shirt. He holds court on social media and in real time to discuss his own “sweatlife” and the brand, becoming a de facto ambassador for it. He will need to keep spreading the retailer’s gospel to help meet his lofty goals.