Lululemon is offering more discounts than usual, and Wall Street says it's a concerning trend
- Lululemon has traditionally kept discounting to a minimum, but new data shows that in the past year the level and depth of its discounting has crept up.
- Analysts say this is a concerning trend that could impact the company's margins down the line, which could knock its share price.
- While the discounting hasn't impacted margins yet, "promotional intensity bears watching," a group of Bernstein analysts wrote in a note to clients on Monday.
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Lululemon has famously been discount-light, and analysts say it's a key reason behind its success.
"Lululemon's price integrity is another reason for its outperformance," Neil Saunders, managing director of GlobalData Retail, wrote in a note to clients in June 2018, after the company reported strong quarterly earnings results. "Promotional periods notwithstanding, products are not discounted, and customers know they must pay the full price if they want the product."
By avoiding heavy discounting, Lululemon is able to keep its margins high, hitting nearly 20% on average over the past five years. That makes it more similar to a luxury brand than a traditional apparel retailer, according to a note from a group of Bernstein analysts sent to clients on Monday.
But according to these analysts, who cited data from WSGN, Lululemon has shifted away from this pricing strategy in recent months and ramped up the level and depth of its discounting, which they see as a concerning trend.
According to WSGN, the number of discounted products at Lululemon has crept up steadily since 2016, hitting 50% in July, August, and September of this year. In 2018, an average of 39% of Lululemon's products were on sale; in 2019 so far, 47% of products have been on sale on average. The average percent markdown year-to-date in 2019 is 22%, compared to 20% in the same period of 2018, according to Bernstein.
While the analysts said that this discounting hasn't had a material impact on Lululemon's margins yet, as it's been able to offset them with supply-chain improvements, it could impact its share price in the longer term.
"If the brand becomes more promotional, we believe it will be difficult for Lululemon to sustain its margin profile, which in turn may put the stock at risk of derating," the analysts wrote, cautioning that its "promotional intensity bears watching."
A spokesperson for Lululemon was not available to comment but directed Business Insider to a recent CNBC interview with CEO Calvin McDonald where he denied that the level of promotions had increased.
"We have never used pricing or promotional activity to drive our topline business," he told CNBC's Courtney Reagan. "We always remain focused on product innovation as a way to delight the guest and to grow our topline business; there has been no change to that approach this quarter or from a year-to-date basis."
Heavy discounting is one of the biggest issues to have plagued the retail industry in recent times. Stores are increasingly leaning on promotions as a way to bring customers in the door, and while this might work in the short term, it ultimately makes it harder to convince customers to pay full price again. Gap is one of the biggest offenders here.
Markdowns can also destroy a brand's image and make its products seem less desirable. Several luxury brands have publicly announced that they are pulling inventory out of some department stores where their items can end up in the clearance racks.
Bernstein offered one possible explanation for why Lululemon might have changed its discounting strategy and that is that it could be increasing discounting as it expands into new categories and rolls out new products. According to Bernstein's research, there was an average of 690 products listed on its website in 2018 versus 920 year-to-date in 2019.