Not long ago, Lululemon seemed unstoppable. As shoppers’ appetites for activewear grew, the brand was one of the few offering stylish, upmarket workout clothes that people loved to wear outside the gym, too. By 2010, its sales were growing more than 50% each quarter.
Not long ago, Lululemon $LULU seemed unstoppable. As shoppers’ appetites for activewear grew, the brand was one of the few offering stylish, upmarket workout clothes that people loved to wear outside the gym, too. By 2010, its sales were growing more than 50% each quarter.
But the market was a lot less crowded then.
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Now that the athleisure trend has blown up, Lululemon faces competition from every which way. Nike $NKE and Under Armour $UAA are targeting the women who were Lululemon’s loyal customers, new activewear labels are always popping up, and apparel companies from Gap $GPS to H&M have launched their own workout lines, often at lower prices.
Though Lululemon’s sales are still growing, it is heavily discounting goods to get customers to buy, shrinking its profits and making investors question whether the brand can ever get back to selling at full price. Lululemon’s stock price dropped 8.9% yesterday (Nov. 30) after investment bank FBR & Co. cut its rating on the shares to “underperform.”
“Given increasing competition in women activewear and a competitive men’s market, we think that LULU may not be able to claw back margin with higher selling prices on product,” analyst Susan Anderson wrote in a note to clients. She reached the conclusion after finding the number of clearance racks at Lululemon stores had nearly doubled since last year and that markdowns were deeper as well.
There are other issues involved in the company’s declining growth. It has been pouring capital into an overseas expansion, which it predicts will ultimately lead back to solid growth in the future. It also faces some of the broader problems that have left companies overloaded with inventory this year and forced them into heavy discounting.
But Lululemon’s inventory turnover and profit margins have been falling for years, as some of the veneer has worn off the brand. The debacle involving its sheer yoga pants in 2013, for instance, cost the company an estimated $67 million in sales, and alienated some of its once die-hard fans. More recently, it had to recall 300,000 tops with hard-tipped elastic drawcords that just might accidentally gouge your eye out.
These are quality issues people don’t easily forgive when they’re shelling out $100 for their yoga gear, and new products like yoga pants that replicate the sensation of being hugged by a close friend—yes, really—probably haven’t helped much.
These missteps haven’t sunk the brand, but each one has been an opportunity for Lululemon’s growing number of activewear competitors. The latest: Beyoncé and British fast-fashion chain Topshop just announced a new collaboration due out next year.
The market for workout clothes, meanwhile, continues to grow rapidly. It’s just that it’s not Lululemon alone that’s getting the sales anymore.
