Lululemon sees membership promise, pivots Mirror to app model

Lululemon continued to stretch its success in the holiday quarter.

Fourth quarter earnings showed the apparel brand increased net revenue by 30% to $2.8 billion, bringing a strong close to a year which also had a 30% increase in revenue.

The growth indicates that the brand is facing down headwinds that left many retailers talking about a consumer pullback during the holidays. Adding a further lift is the fact that Lululemon wasn’t among those participating in the highly promotional environment that many retailers cited during the holidays. The brand maintains premium positioning for its yoga pants and other athleisure wear, so it doesn’t run heavy sales as a principle. It stuck with that, even at a time when many brands were discounting to work through a glut of inventory, and incentivize consumers who were facing higher gas and grocery prices to buy.

“We do not drive our client growth through discounts or promotions, and we have no intentions to do so,” CEO Calvin McDonald told analysts on the company’s earnings call. “We run a full-price business with markdown strategically used to clear seasonal and other select product, and this will remain our approach in the future.”

The results are part of the reason why Lululemon is a much-studied brand, both in the direct-to-consumer space and in retail overall.

Like many brands, Lululemon is putting an emphasis on loyalty at a time when profitability is replacing growth as a key focus among retailers, and consumers are exercising more caution about discretionary purchases. A key emerging piece of the brand’s strategy centers around membership. In October, the brand launched a two-tier membership program that includes a free tier called Essentials, and Studio, which is $39 a month.

The membership programs include a number of benefits, including access to workout content, early access to product drops and fast-tracked returns.

McDonald told analysts that the essentials program has “significantly exceeded our expectations.” More than nine million members enrolled in the first five months, demonstrating “significant potential,” McDonald said.

“The rapid rate of sign-up speaks to the incredible loyalty of our guests, and the early results show our membership program increases the frequency of guests engaging with us,” McDonald said. “For example, more than 30% of members have already participated in at least one of the benefits of the program, and we expect this engagement to drive retention and incremental purchasing behavior going forward.”

The Studio program, which includes discounts and access to more workouts both online and in-person, is undergoing changes as it gets underway. The company is repositioning its connected fitness device Mirror as an app that will be part of the Studio program. The program will continue to provide in-home hardware and content.

After the revamp, the app-based model is set to launch this summer at a lower subscription rate.

“The recent launch of lululemon Studio has provided a new way to scale a paid membership program,” McDonald said. “Our best-in-class content helps build on our community of engaged guests, deepens our connection with them and drive incremental purchases of Lululemon product. In fact, after studying the behavior of members, our initial analysis suggests that their spend on Lululemon product increases approximately 9%, and this 9% is incremental. However, as you know, since our acquisition, the at-home fitness space has been challenging. While members love our content, hardware sales did not match our expectations. And even though our CAC has continued to improve, it has not improved enough to maintain the current level of investment.”

It comes three years after Lululemon acquired Mirror for $500 million at the height of the pandemic-era home fitness boom. Now, the company is taking a $443 million impairment charge as it shifts strategy.

“We view Lululemon Studio in the same way we view any innovation. We test, we learn and we evolve as necessary,” McDonald said. “Although the acquisition has not fully materialized as originally intended, we're in a much better position in our understanding of the community and our new membership program as a result.”

Despite the Mirror pivot, the brand’s results and early uptake of the Essentials tier present promise make the membership program a driver of growth. Moving forward, the goals are threefold, said CFO Meghan Frank.

“We continue to see opportunity to build our community, increase engagement and drive incremental spend,” Frank said.