Yahoo Finance Can Lululemon Lock in Shoppers With Annual Subscription Plans?
Lululemon Athletica (NASDAQ: LULU) recently started testing an annual subscription plan for customers in Edmonton, Canada. The service costs 128 Canadian dollars ($96) per year and includes a pair of branded yoga pants or shorts, free classes at different yoga studios each month, invitations to exclusive workout events, early access to new products, free expedited shipping for online orders, and other perks.
Early adopters told Bloomberg that the pants were worth about CA$98 ($73), and that the perks complemented Lululemon's earlier efforts at fostering social connections with free yoga classes and workout clubs. The subscription provides classes at various yoga studios, where Lululemon's subscribers can recognize each other from their specially branded shorts or pants.
Image source: Lululemon.
If the test run is successful, Lululemon could launch the subscription in other markets. Will that effort lock in more customers, or is Lululemon overestimating its customers' brand loyalty?
How a subscription plan could help Lululemon
Lululemon consistently beat analysts' top and bottom line estimates over the past year, but its growth is decelerating.
Metric | Q3 2017 | Q4 2017 | Q1 2018 | Q2 2018 | Q3 2018 |
|---|---|---|---|---|---|
Comps | 8% | 12% | 20% | 20% | 17% |
Revenue | 14% | 18% | 25% | 25% | 21% |
YOY growth. Source: Lululemon quarterly reports. (As reported, not on a constant currency basis.)
Last quarter, Lululemon attributed its growth to the expansion of its online and in-store pickup options, strong demand from its core U.S. and Canada markets, fresh growth from overseas markets like China and Europe, and the reinforcement of its brand loyalty through community events. It also reiterated its long-term goal of exceeding $4 billion in revenues by 2020, versus its estimated revenue of $3.25 billion this year.
For the fourth quarter, Lululemon expects its revenue to rise 20% to 21%, which matches the consensus forecast but indicates that its top line growth is hitting a plateau. Rolling out a loyalty plan could help Lululemon maintain its momentum, tether more customers to its ecosystem, add a fresh stream of subscription revenue, and widen its moat against rivals, which include Nike, Adidas, and Gap's (NYSE: GPS) growing Athleta yoga apparel and sportswear brand.
Gap has been aggressively expanding Athleta, which previously sold most of its products online, into brick-and-mortar stores that also offer free yoga classes. Gap finished last quarter with 157 Athleta stores across North America, up from 140 locations a year earlier. Lululemon finished last quarter with 426 stores.
Image source: Getty Images.
Why a subscription plan might not work
Promoting a subscription plan makes sense for Lululemon, but it could fail for three reasons.
First, apparel retailers generally don't launch subscription plans. Consumers will pay $119 per year for Amazon (NASDAQ: AMZN) Prime, but that bundle offers streaming media, free e-books, discounts, and other perks on top of its free shipping options. Lululemon is leveraging its brand loyalty and community presence to sell its subscriptions, which is uncharted territory.
Second, Lululemon's brand appeals to more affluent customers who are already accustomed to paying full price for its products -- and might not need more incentives to keep shopping. Meanwhile, shoppers who only occasionally shop at Lululemon might not be compelled to sign up. Therefore, adding perks to its loyalty program could erode Lululemon's margins (which expanded in recent quarters), but fail to significantly boost its revenues.
Lastly, Lululemon's rivals could retaliate with more attractive subscription plans. Gap already bundles its namesake brand, Old Navy, Banana Republic, and Athleta together with its Bright rewards program. So if Lululemon's bundles take off, Gap could launch a competing subscription package with more attractive perks.
The key takeaway
Lululemon's subscription experiment is interesting, but investors shouldn't expect a broader roll-out anytime soon. For now, investors should see if Lululemon can maintain its robust sales growth next year while fending off its rivals in the yoga apparel space.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Lululemon Athletica and Nike. The Motley Fool has a disclosure policy.
