Lululemon Athletica (NASDAQ:LULU) is tired of being a yoga company with a female focus. That fatigue comes as LULU stock is trading just a few bucks shy of its 52-week high.
After a record year that ended with a market cap of $22.7 billion, on fiscal 2019 sales of $3.3 billion, Lululemon has decided to tap the hardest market in athletics: sneakers.
This starts with a plan it calls Power of Three, which involves international expansion, an expanded line of men’s wear, along with events and a membership program.
The real kicker, however, are the new kicks, or sneakers, announced at the company’s Investor Day event April 24.
Lululemon CEO Calvin McDonald, who joined the apparel maker from the LVMH (OTCMKTS:LVMUY) unit Sephora last year after his predecessor went down in scandal, will be re-selling sneakers from Athletic Propulsion Labs, a Los Angeles-based luxury label.
The Danger Afoot
In going into footwear, Lululemon is entering an area that nearly destroyed Under Armour (NYSE:UAA).
A few years ago, Under Armour was worth twice Lululemon’s value. I even suggested Under Armour should buy Lululemon, because the Baltimore company was losing distribution and Lululemon had shown it could profit with its own stores. Besides, I figured, marrying a men’s line to a women’s line made sense.
Today, it’s Lululemon that could buy Under Armour, with its market cap of just $9.4 billion and a reputation in the U.S. has been hit by problems with its sneakers.
Shoes have become the most complex, difficult sale in fashion. Getting a basketball player’s endorsement is no longer enough. Entertainers are now key influencers, and the sneakers themselves are high-tech fashion.
How can Lululemon hope to succeed?
Lululemon’s Low-Risk Strategy
Lululemon’s strategy starts with Athletic Propulsion, which got its ignominious start 10 years ago when the NBA banned the shoes as an “undue competitive advantage” and whose prices start at $250 per pair.
APL has made itself a hot fashion brand with fabric tops it calls “Techloom” that make the shoes breathable. This has attracted free publicity from celebrities like Oprah Winfrey and Kris Jenner.
For now, LULU CEO McDonald says he’s only going after the running shoe market, as part of an effort to expand Lululemon’s niche beyond yoga into more aerobic sports. But shoe sales also play into the company’s men’s wear efforts.
As with women, Lululemon is coming after men as a lifestyle choice. It plans to offer skin care products, as well as shoes and outerwear. The risk is limited because APL has other sales channels.
The key to Lululemon profits will remain its stores, which are its exclusive merchandise outlets. By sourcing designs directly from Asia and only selling directly, Lululemon gets gross profits over 50% of sales, and brings 17% of revenue to the net income line. Nike (NYSE:NKE), by contrast, brings just 5% of revenue to the net income line.
The LULU Stock Bottom Line
The Lululemon stock price is up 19.4% this year, compared to the 8.4% gain in the Invesco Dynamic Retail ETF (NYSEArca:PMR), the exchange-trade fund with a 31-stock portfolio that includes LULU stock as its biggest holding.
What can hurt Lululemon most is cutting corners, as in its sheer pants debacle of 2013, where it was forced to recall merchandise. That cost former CEO Christine Day her job. The other thing that can hurt Lululemon is talking down to customers, as founder Chip Wilson learned when he blamed overweight customers for issues with the clothing. He was soon out the door, too.
Since then, Lululemon has found a functional strategy, based on quality control, a high-end fashion image and distribution control through its own stores. Whether it can really draw men into what looks like a woman’s clothing store is unknown, but for those with high incomes, it can satisfy what demand it gets.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
