What Lululemon Learned From the Recession

Bad times can sink a retailer, or make them strong. Womens' yogawear chain lululemon athletica (LULU) has used the tough economy as an opportunity to sharpen up its business. The result of taking this attitude has been soaring sales at existing stores -- up more than 30 percent in the first half of this year.

"Thank God for the recession," lululemon chief financial officer John Currie recently told Bloomberg news.

Here's what lululemon learned over the past two years:

• Research real estate carefully. The company was expanding in a fairly mindless way as the recession hit, without a lot of research into exactly what neighborhood or mall in a market would be best for their stores. The result was that the 35 stores opened in 2008 were the chain's least productive -- and lululemon executives were smart enough to realize it wasn't just because the economy had tanked. The locations weren't ideal. Now, as the chain seeks to rise from 75 to 300 stores, it's gathering way more intel on income levels and local retail scenes to discover the exact right spot for their store before signing a lease.
• Hoard your cash. Lululemon turned frugal and built its war chest. It reduced inventory levels, focusing on the most popular styles and colors. Its cash flow shot up 17-fold to more than $100 million by early this year. The result: So much cash has piled up now that there's discussion of raising the quarterly dividend or possibly buying back shares. The company can also accomplish its expansion mostly with cash now, which will reduce store-opening costs and give it a major edge against competitors who'll need to use debt financing.
• Stay off TV. While big competitors Nike and Adidas spend massively to build their brand, lululemon stands apart with its community-based outreach approach which markets mostly by word of mouth, and offers local yoga instructors free clothes. The chain gets pros' opinions on the garments in the process, and starts the positive buzz growing at the yoga-studio level.
• Understand the power of free. The company reaches out to its core yoga-enthusiast audience by creating a free, annual one-hour yoga event, Salutation Nation. Since the event welcomes yoga beginners, it's the perfect opportunity for newbies to get exposed to the lululemon brand before they decide they like someone else's yogawear. Held in parks and more than 70 Lululemon stores, Salutation Nation was expected to draw 25,000 to its 2010 event held last August.