Providing consumers with a complete omnichannel shopping experience is a major challenge today in order to be competitive in the retail sector. Providing the convenience of physically going to a store or ordering online for pickup or delivery can not only increase spending, but also build customer loyalty.
Of them best clothing companies who succeed in creating a seamless omnichannel experience are lululemon (LULU 1.04%) and Nike (NKE 1.47%). But the former outstripped the latter in one important area: online sales. And this has its advantages.
Let’s take a closer look at what Lululemon, whose the stock is down 20% in 2022, doing well.
Lululemon drives more direct-to-consumer sales
Direct to consumer (DTC) Lululemon sales represent all orders placed through the company’s website and mobile app. In the most recent quarter (ended October 31), DTC’s revenue accounted for 40.4% of overall business. In its most recent fiscal quarter (ended February 28), Nike generated 26% of its sales through its digital channels. This number was about 33% in North America.
At the height of the coronavirus pandemic, during the period May-July 2020, an incredible 61.4% of Lululemon’s revenue came from e-commerce, demonstrating the inherent flexibility of the business model at a time when physical purchases were limited. .
Around the same time, Nike’s digital channel generated 30% of its overall business, a figure that seems low given the temporary store closures. Nike’s management team estimates that digital sales will account for half of the business in the next few years, a figure that Lululemon has already managed to eclipse.
Why is this beneficial for Lululemon?
Having a larger share of sales coming from the DTC channel has certain advantages, and it depends on the ability to cut out the middleman.
Because it doesn’t give savings to third-party retailers, Lululemon has a better financial profile than Nike. Over the past 12 months, Nike Gross margin of 46.3% and an operating margin of 15.8% are both lower than Lululemon’s gross margin of 57.8% and operating margin of 21.3%. In an inflationary environment, such as the one we currently find ourselves in, Lululemon has more leeway to absorb higher input costs.
Since Lululemon sells all of its merchandise primarily through its network of 552 company-owned stores globally, it has a better handle on inventory levels. This situation allows the company to avoid costly markdowns to get rid of excess product, which can be detrimental to the brand.
Finally, Lululemon is able to take full ownership of the relationship with its customers. This means directly driving loyalty and engagement and having access to all the purchase data that comes with it. Having this valuable information in-house can help inform marketing efforts, product introductions, and pricing strategy.
Nike realizes the benefits of focusing more on direct contact with the consumer. “Over the past four years, we’ve reduced the number of wholesale accounts globally by more than 50%,” Nike chief financial officer Matt Friend said in the latest earnings call. The company wants to prioritize maintaining the strength of its brand.
There is however a negative impact of having more DTC cases. And that’s the additional lost sales that Lululemon might be able to generate if it had more wholesale partners. But based on the company’s monster success over the past decade, with quarterly revenue increasing more than sixfold, I think management knows what it’s doing.
Shareholders should expect continued strength from DTC when Lululemon reports fourth quarter and fiscal year 2021 financial results on Tuesday, March 29.