BUSINESS

Lululemon to pass on higher costs only on more technical, specialty items

09/09/2011 07:38 EDT | Updated 11/09/2011 05:12 EST
TORONTO - Fitness wear retailer Lululemon Athletica Inc. said Friday that it will pass some of its higher costs on to customers, but only on select clothing items.

Some clothing companies have said they expect prices to rise about 10 per cent by the spring, with most increases hitting in the second half of this year in time for the December holiday shopping season.

But Vancouver-based Lululemon, famed for its high-end yoga gear, said its long-term plan for pricing is to "stay put" because it has enough internal efficiencies to keep costs mainly stable, except on a few products that require more research to develop.

"That said, what we look at is, as we design a more technical garment, that we do take the pricing (higher) on those," CEO Christine Day said on a conference call after the company reported higher profits in the second quarter but lowered predictions for the third quarter.

Day said the company would take "a more blended approach" to its pricing.

For example, a specialty hoodie or defined jacket that has something unique in it would take higher pricing, while more basic items would be "priced well," she said.

Companies like Levi Strauss & Co., Nautica, Nike and shoemaker Steve Madden have all either raised prices or announced plans to do so. It's a response to a surge in labour and raw material costs that are squeezing clothing retailers and manufacturers.

The price of cotton has more than doubled in the past year, while the cost of synthetic fabrics has climbed about 50 per cent due to higher demand. Lululemon said its products use minimal cotton.

Day made the comments the same day the company recorded its second-quarter profit rose 77 per cent to $38.4 million, as it took in stronger sales.

But while the company revised its full-year revenue outlook upwards to between $930 million and $950 million from earlier guidance of $915 million to $930 million, it expects earnings per share to fall to between $1.10 and $1.14 from earlier estimates of $2.10 to $2.16.

The company also lowered its third-quarter earnings per share guidance to between 22 and 24 cents on revenue of between $225 million and $230 million. Analysts had been predicting 24 cents.

As a result, shares in Lululemon closed down nearly four per cent or $2.10 at $54.94 on the Toronto Stock Exchange on Friday after falling as much as six per cent earlier in the day.

But Laura Champine of Cowen and Co. said Lululemon has a habit of being cautious and raised her own estimates for the company going forward.

"Guidance might disappoint some investors, but we believe management is simply being conservative and we do not see any red flags in today's release," she wrote in a research note explaining that Lululemon's results have consistently beaten the company's own expectations every quarter since the first quarter of 2008.

Lululemon, a household name in its native Canada, is growing in popularity in the United States and Australia, where the company continues to open new stores. That trend factor has consistently boosted quarterly profits.

Lululemon has said several times that it plans to fix its inventory troubles as it struggles to keep up with demand. But that short supply also means it can avoid end-of-season markdowns.

Earlier this year, it completed a massive overhaul of its e-commerce site and plans to ramp up its online presence through social media, web advertising and mobile applications.

It has also announced a partnership with Disney for its Ivivva children's line and is shoring up sales of its men's line.

But it is also dealing with increased competition from new yoga clothier Athleta, which is owned by Gap Inc., and Victoria's Secret, which launched its own yoga line. On Friday, the company said it is not seeing a "measurable impact" from new competition.

The company's quarterly profit was equal to 26 cents per share, up from 15 cents per share or $21.7 million in the comparable period a year ago.

Lululemon (TSX:LLL) said its revenue for the 13 weeks ended July 31 increased 39 per cent to $212.3 million from $152.2 million. The company's stock split took effect in early July, and all results reflect the split.

Comparable store sales for the second quarter increased by 20 per cent on a constant dollar basis.

Day said business was "healthy" during the second quarter as strong sales productivity and operating margins grew pre-tax income by more than 60 per cent.

Lululemon opened its first store in 1998 in Vancouver and has expanded to 151 stores in the past decade.