Analyst on Lululemon raising prices amid rising inflation: ‘Clearly they have pricing power’

B. Riley Securities Senior Research Analyst and Managing Director Susan Anderson joins Yahoo Finance Live to discuss company earnings for Lululemon, pricing power, consumer demand, and the outlook for growth amid inflation.

Video Transcript

- Lululemon reported better than expected quarterly profits, but did send a major warning that it's not immune to the inflationary pressures hammering many other retailers. Susan Anderson covers Lululemon at B. Riley Securities, and joins us now. Good to see you here, Susan. Look, Lululemon said on the earnings call last night they're not seeing a lot of resistance to the price increases they have taken, but they did signal a 10% price increase for next year. How do you think the consumer is going to respond to that?

SUSAN ANDERSON: Yeah, so they said they're raising prices on 10% of the assortment. So they are being very cautious on where they raise prices. But so far, where they have taken prices, they haven't seen a resistance. Their competitors have raised prices more than they have, so I think that gap is narrowing. And clearly, they have pricing power. So I do think they could take a lot more pricing if they wanted to, but they're being really careful about where they're going to take pricing. They definitely don't want to push the customer away, especially in this inflationary environment.

- Susan, how much pricing still exists-- pricing power, rather, still exists in a trade-down scenario, like we've heard from other retailers over the course of this earnings season?

SUSAN ANDERSON: Yeah, so so far this earnings season, we're still hearing that the higher-end consumer is not pulling back necessarily as much as the low to middle. I think the middle-income consumer is starting to a little bit now. So we're still seeing the higher-end consumer buy at full price.

So as of now, it seems like they're not yet pushing back or even looking to trade down. And I think with the gap narrowing between Lulu's pricing, given the fact they haven't really raised much prices yet, and someone else like, say, Athleta, who has raised prices, they have a lot of room there where the consumer would probably rather spend another, you know, call it $20 or so, especially at the higher end, to get the higher quality that Lulu offers.

- How do you think this brand would do in a recession?

SUSAN ANDERSON: I mean, I think in a deep recession, like the Great Recession that we saw, right, back in '07, '08, '09, you know, everyone's going to see declining sales, or at least weakening sales, depending on kind of where your base level was. So I think you would definitely see the higher-end consumer also pull back in that type of scenario, where we see significantly rising unemployment rates. But as of now, we haven't really seen that consumer pull back just yet, I think because employment still remains very strong. But in a deeper recessionary environment, I would definitely expect them to pull back, and for Lulu's sales to weaken because of that.

- Susan, I don't know why I've become so interested in this footwear play from Lulu, but perhaps because it's something that they've talked up a great deal. We're still waiting for some real kind of hard figures on how well it's doing, but they've said-- and I quote-- to this point in time, it's going to be a touch and go-- not touch and go, an explore as we go, learn as we go, excuse me, category for them. When do you see that paying off, especially as it's going to go from performance into Sozzi's favorite category, which is slides, in the future?

SUSAN ANDERSON: Yeah, no, it's good to see them really kind of easing their way into footwear. We've seen others, like, say Under Armour, trying to get into footwear, and I think it's better to test and learn as you go because it's definitely a very difficult category. So far, it sounds like the launch of their women's footwear lines have been a success. And if you just look online, most of them are actually sold out. I think it was definitely a limited edition launch.

And that, coupled with supply chain issues everywhere, probably the allocation was pretty low. But so far, it sounds like it's been very well received by the consumer. But I think it's a positive that they're taking their time moving into that direction because footwear is so much more technical than apparel, and there's a lot of areas where you could mess up. And you just don't want to be stuck with a lot of inventory, or also give the consumer the wrong impression of your footwear line.

- I have been surprised, Susan, by how fast, compared to how fast Lululemon has gone in the past entering new categories. So footwear. They talked about on the call last night golf. I believe they're also now going to start dabbling in hiking in a couple of weeks, with some form of new line. Is the ultimate loser here a company like an Under Armour?

SUSAN ANDERSON: Well, I think they've already taken share from Under Armour, particularly on the men's side. 5, call it 10 years ago, Under Armour's khakis were the next hottest thing for men, right, and everyone was buying them. And then Lulu came out with their own version, which was even better. And so-- and that's what I think really jumpstarted their men's business, and they saw a lot of men move into their apparel line.

So I think Under Armour already has seen pressure because of that. And Under Armour kind of moved in a different direction anyway, right, when they started to distribute in Kohl's and kind of brought their brand downstream. And Lulu went the opposite, and actually started to add more quality to their apparel. So I don't necessarily think that it's going to damage Under Armour more. I think it's a different customer now when we look at the two, a slightly different customer.

On the golf side of things, though, there maybe could be some more share to be taken. Under Armour is definitely a strong player, particularly in golf polos. So there could be some share opportunity there.

- Why has it been so difficult for companies to estimate the inventory levels that they need? They mentioned that they likely left, yes, demand on the table last year, as they were under inventory. Now, it seems like they're, what, 70% over inventory.

SUSAN ANDERSON: Yes, so inventory was up quite a bit. But when you look on a three-year CAGR basis, it was up just over 30%, which was more in line with sales, and then also if you backed out that in-transit. So last year, it was very, very lean because of the supply chain issues, so they were kind of playing catch-up, and then also bringing products in earlier because of the supply chain issues. I think it was about 5% was in transit. So that also added to the growth.

- All right. We're going to continue to keep a close eye on shares of LULU throughout the rest of the day, as we know you will, as well. Susan Anderson, B. Riley Securities senior research analyst, thanks so much for joining us here today.