Has Lululemon Perfected The D2C Balancing Act?

Lululemon is to other companies what Meghan Markle is to celebrities: Whether the headlines are positive or negative, the brand is so pretty that we just can’t look away.

It was definitely the former last week, with the Vancouver-based athleisure brand posting some of its strongest numbers since 2011, powered by exceptional strength in its D2C business.

And Lulu’s prediction that digital sales, which rose to 26% of its total, may eventually account for 50% of all sales, really has observers buzzing. (Among the headlines? “Nearly flawless,” says one, and “Has Lululemon Figured Out the Magic Mix of Bricks and Ether?”)

But because those numbers hit my inbox just when I heard about two D2C brands -- Wayfair and Lands’ End --making big retail moves, I feel it’s worth asking: Does anybody really know whether there’s a “right” ratio between direct and retail sales?

First, a closer look at Lulu’s star turn. The company says its revenue in the fourth quarter jumped 26% to $1.2 billion, with comparable-store sales climbing 6%. But the number that caught the attention of many observers was the surge in its direct-to-consumer net revenues, which jumped 37%. And for the full year, those D2C sales soared 45%.

The company’s prediction that 50% of sales will be digital is impressive, especially since “ecommerce operating margins are greater than store operating margins,” writes Kimberley Greenberger, an equity analyst who follows the company for Morgan Stanley. And aiming to achieve that percentage when comparable stores sales are so strong -- “a rarity in our sector, outside of off-price retailers” -- is especially ambitious, she writes.

But analysts are also quick to point out the risks. In a category this crowded, competition could get even more aggressive. Or consumers could lose their love for yoga wear and start migrating back to denim.

Jen Redding, an analyst who follows Lululemon for Wedbush Securities, recently lowered the company’s rating from “outperform” to “neutral.” “We see Lulu as positioned better than most, but also see less upside ahead as the retailer faces tough comparisons in a dynamic retail environment, “ she writes.

Dynamic, of course, is a kinder way to say brutal. Which is why I couldn’t help but chew over the news from Wayfair and Lands’ End.

Wayfair, the D2C home furnishings giant, has long downplayed any interest in opening physical stores, except a pop-up here or there. So the announcement that it is wading into those dynamic waters with a full-line store in the Natick Mall in Massachusetts is a big deal. (It’s a fancy mall, too, with a Neiman Marcus and a Burberry.) And Wayfair is promising four more pop-ups this year.

And Lands’ End, a Middle American D2C favorite that has had plenty of ups and downs as it continues to distance itself from Sears, reported its earnings, too. Despite an overall dip in revenues in the fourth quarter, same-store sales for its retail division gained 9.1%. And sales at company-owned stores, which it is actively expanding -- one opened last week in Pittsburgh, bringing the total to 18 -- improved 15.1%.

Lands’ End, which began as a catalog company, has shifted its retail strategy as part of its turnaround plan. It has been closing Lands' End Shops located within Sears stores, and now has about 40, down from 180 last year. A spokesperson say it’s decided not to renew those leases, so they will close during this fiscal year.

Obviously, it’s up to each brand to decide -- and constantly revise -- best strategies for balancing channels. They need enough stores so that they can win new buyers and give shoppers the chance to experience their brands up close and in person. And they need a D2C operation that bypasses retail’s craptastic features (for companies, that’s pricey rent, and for consumers, it’s the drudgery of finding parking and fighting crowds) and conveniently serves customers.

But if Lululemon is the model companies are chasing, they'd better make sure it all comes together, no matter what channel ratio they’ve got. That means offering exceptional products, differentiated experiences and a brand image so attractive that consumers just can’t stay away.

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