Can Gap Dethrone Lululemon as Queen of Fitness Chic?

by Marc Bastow | July 20, 2012 12:40 pm

It appears an interesting situation is brewing around women’s athletic apparel makers Lululemon (NYSE:LULU[1]) and the Athleta brand from Gap Inc. (NYSE:GPS[2]): Everywhere a Lululemon store opens, Athleta opens one of their own[3] somewhere within shouting distance.

Bloomberg Businessweek uncovered that 13 of Athleta’s store locations are within a mile [4]or so of Lululemon stores. Considering women’s active wear is a $14 billion (and growing) industry, it’s certainly worth the effort for Gap.

Considering Lululemon and Athleta are very different in their approach, both in marketing and product, it’s worth taking a look — and perhaps picking a favorite.

Lululemon is a designer and retailer of technical athletic apparel with 180 store locations primarily in North America and Australia. Lululemon has principally worked on burnishing an image that fits a lifestyle, and that lifestyle is essentially wrapped around yoga.

The company sells accessories including bags, socks, underwear, yoga mats, instructional and yoga DVDs. Lululemon schedules and conducts yoga classes, and their followers and main customers look at the brand as not just an athletic style but a fashion choice, wearing the gear not just to classes but around town as part of the daily clothing rotation.

Financially, the company boasts around $1 billion in revenues with just under $200 million in net profits. Both the top and bottom lines are on a very nice upward trend, and cash flow more than adequately covers the cost of expansion. LULU shares trade around 30% under their 52-week high of $81, but they also trade at an earnings multiple of 43 times trailing 12-month earnings, which feels just a bit excessive.

So what can go wrong?

Well here’s the word from the street, as evidenced by the many comments to the Bloomberg story and several women questioned in an informal poll: The quality of the merchandise is flagging, and their sales staff, while qualified in how to sell, are robotic in their approach, taking an almost cult-like glee in extolling the mantra of the yoga-based lifestyle.

Frayed seams (by the way Lululemon will hem workout pants as part of their service), dye that runs as people sweat, unfriendly return policies and now-crowded classes are helping to put off some customers.

One last item: The clothes ain’t cheap.

Which brings us to Athleta, the Petaluma, Calif., store bought by Gap in 2008 to extend its reach in women’s active-wear. Athleta embodies much of the same vision as Lululemon, with salespeople that work with women to tailor lifestyles and sports choices to lines of clothing, offering classes in yoga (and in some cases actually offering them in-store along with pilates) and providing discounts in pricing to fitness instructors in exchange for referrals.

A huge difference is the cost, with Athleta gear usually costing $10 or less than virtually the same types of clothing offered by Lululemon. Additionally — and again, based on a very unscientific survey — the Athleta customer base appears to view the clothing as better made, and more of a choice for the workout part of the day.

Interestingly, Athleta consumers find the stores themselves unappealing and unattractive, preferring instead to use its online site for shopping.

Financially, of course, Athleta knocks Lululemon out the park since it’s backed by Gap. Gap reports sales from Athleta and its Piperlime Web store together, and at $301 million in the year ended Jan. 28, revenue is less than a third the size of Lululemon’s. But that is a drop in the bucket for Gap’s $15 billion in overall sales. An investment in Athleta’s success means you have to take a chance on the rest of Gap, which includes the namesake stores, as well as Old Navy and Banana Republic.

GPS shares are around a 52-week high, but trade for a more-reasonable (though still not ideal) 18 times trailing earnings. And unlike LULU, it provides a modest 1.7% dividend yield.

I hate to go all wishy-washy, but this one’s a draw — which one you invest in moreso has to do with you investing timeline.

Analysts still expect Lululemon to average roughly 30% annual growth in the next five years — much more than GPS. So LULU definitely might be the hotter growth play — though you’ll want to keep your eye on Athleta’s progress.

Not that GPS is expected to halt. Gap still is projected to grow more than 10% annually, is a much more established and diverse company and offers at least something as far as income is concerned. Thus, GPS plays better for investors with a longer horizon.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. LULU: http://studio-5.financialcontent.com/investplace/quote?Symbol=LULU
  2. GPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GPS
  3. opens one of their own: http://www.businessweek.com/news/2012-07-17/gap-s-athleta-stalks-lululemon-one-yoga-store-at-a-time
  4. 13 of Athleta’s store locations are within a mile : http://www.businessweek.com/news/2012-07-17/gap-s-athleta-stalks-lululemon-one-yoga-store-at-a-time

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