Lululemon has ‘extreme pricing power,’ analyst says

Barclays Managing Director Adrienne Yih joins Yahoo Finance Live to discuss company earnings for Lululemon despite being impacted by COVID-19.

Video Transcript

JULIE HYMAN: Well, as we were discussing earlier, Lululemon expects sales this year to exceed analyst estimates. And among other things, CEO Calvin McDonald said on the conference call, the company is benefiting from a renewed focus on physical, mental, and social well-being following the pandemic. And it looks like investors like that. The shares are up 7%. For more on Lulu, let's welcome in Adrienne Yih, managing director and consumer discretionary analyst at Barclays. It's great to see you, Adrienne. So perhaps you can help us in the little debate that Mr. Sozzi and I have been having. The company said, Lululemon said we might still see selective price increases in the mid-single digits, I think they said, or in the single digits, on some items. What is the price elasticity for a Lululemon, a pricing power, given their customer base? ADRIENNE YIH: Yeah, they have extreme pricing power. The pants run anywhere between $118 up to $128. And so that is, that is an extraordinarily high price for arguably a legging. One of the things that I would say is that during the pandemic, they've actually expanded the active customer base. And what we've seen them doing is going from sort of a soccer mom, right, pre-pandemic to the college girl to the high school girl to the middle school girl. And when you start moving down that kind of ramp, the price elasticity, you would think, would actually be less. Like, they would have less ability to afford that. But the desirability in these middle schools and where they're starting, they're starting their kind of lifetime value of this customer, is so intense that these girls will get gift cards for each other for their birthdays or bar mitzvahs. And there really isn't any price elasticity. So if there is going to be a price increase, we think absolutely, they'll be able to pass it through certainly on their proven apparel items. BRIAN SOZZI: Ugh, I'm really on an island by myself here today, Adrienne. I appreciate-- we go back a long way, too, but nonetheless, it's all good. Why is this brand so popular? You say they have extreme pricing power, but there are other competitors out there. This is not just a market that Lululemon owns by itself. ADRIENNE YIH: Yes. So if you get into the mind of the female, and they certainly are doing this with the male as well, brands that are scarce, that give you a particular look and feel, and when you put it on, you feel like Superwoman, right, or Superman in Lulu. That little omega sign that sits on the back of, you know, of a bra or on the pants, it is a symbol of kind of strength, wellness, health, like you're doing something good for yourself. The best thing that a retailer can do, as you know, Brian, is to make that person, when they put on that piece of apparel or that footwear, to change their psyche, right, to change their mental confidence. And that's what Lulu does. It's a confidence builder, not just an apparel item. JULIE HYMAN: Adrienne, I have to admit, I have been somewhat surprised at the sustainability of the so-called athleisure trend, right? Which, I guess, the pandemic just extended, to some extent, and the company references that, to some extent, on the conference call. The people-- you know, there's this sort of variability or flexibility now in where you can wear leggings, right? But do you think-- I mean, is there-- but is there an end to that trend at some point? Or is that just not even a trend anymore? It's just the way we live. ADRIENNE YIH: Well, Julie, you know what's actually happening, is that we're actually morphing out of athleisure, and it's moving into sort of just general apparel, right? Casual apparel, so their ABC pants, their on the move product. In fact, with Lulu not only are they doing the core, which is run, yoga, gym, right? So yesterday, they talked about launching tennis, golf. They've already been doing accessories. And footwear, obviously, is the most recent one that occurred on March 22. So they are actually expanding these serviceable markets, right? So there's the TAM of athleisure, but they're actually bolting on new opportunities for her wardrobe, right? The worst thing that you could do as a retailer is expect the same people to buy more of the same things. You want new people and your current customers to buy the new things, right? And that's how you continue to drive that comp. It's expanding, becoming, you know-- a 20% portion of her wardrobe was the yogawear or the active. And now you can actually-- the to and from, right? Beyond the move. So that's really kind of what we think is going to be the driver of the compounding nature of the Lululemon stock. BRIAN SOZZI: So Adrienne, about a month from now, Lululemon will have an analyst day. They teased that on the earnings call last night. Now they were very hesitant to say anything about that Mirror business, which has been a disaster for them. What do you think they will say about it at that analyst day? ADRIENNE YIH: So you're absolutely right. So it was a $500 million acquisition, doing, call it $130 million, which is half of what the sales when they acquired it, right? So, and as we saw from Peloton and these at-home fitness products, that's probably not what people want to do upon reopening. You know, I think that they are not going to give us what we want, which I think the investors would be happy to hear them say, look, this is a mistake, and maybe we're winding it down or whatever we're going to be doing with it. I do not believe that they are going to do that. They have historically made investments in digital, in tech. And so I think this is going to go into their sort of, like, lab experiment in terms of incubating something. And it might just go into that lineup. It's going to be less diluted than it was the prior year. So I think they're probably going to try to feel out what types of things they can do with that product to maybe bolster it and to get some buy-in. But I agree with you on that. That's where we agree. I think that is a tough, tough-- BRIAN SOZZI: I'll take it. ADRIENNE YIH: --business to turn around. JULIE HYMAN: He'll take the W. He needs it wherever he can get it. Let's talk about one more aspect that Sozz and I have debated about, and that's the shoes that Lulu is introducing. The company said in the conference call that the launch has gone better than they anticipated. But as we know, as anyone who's watched retail knows, man, shoes are a tough business. Athletic shoes are a tough business to get into. Do you think they make a real go of it here? ADRIENNE YIH: So the Blissfeel, which is the first one that they launched, so this is a tough one for me because the aesthetic is fantastic. What I will tell you is On Running and HOKA, those have long heritages, right, and an installed base of runners. And if you are a runner, you will know that you will wear the same shoe for fear of injury for 15 years, the same one over and over and over. And there's kind of a superstition that you get hurt when you kind of change your footwear, right? So from a performance standpoint, I think it's going to be very difficult to compete tete-á-tete against Nikes, the Adis, the New Balances, right? But what I will say is the completeness, what I was saying earlier, completeness of that Superman, Superwoman outfit, head to toe, right, it ends with the feet. So to the extent that, you know, a lot of these performance shoes are now walkabouts-- I call them walkabouts, right? They're not really using them for the intended purpose, the performance purpose, but boy, do they look cool. They're super comfortable, and they have the brand. So I actually am going to take the other side of that. And I'm going to say that footwear is going to work for them. They're doing it in a very deliberate and a very measured way. It's at 148 bucks. You know, totally accessible. And they look fantastic-- their color, you know, the assortment, the choice. I actually think it's going to work, but I don't think it's going to work necessarily because people, marathoners, are hopping into these. JULIE HYMAN: Yeah, I feel like you're a runner, Adrienne. You speak from experience there maybe. Adrienne Yih, thanks so much. ADRIENNE YIH: Some day. Thanks a lot. JULIE HYMAN: It's so good to connect with you. Really appreciate it. Adrienne Yih at Barclays.