By
Bloomberg
Published
Jun 7, 2024
Lululemon Athletic Inc. just pulled off a tricky feat. The Canadian maker of leggings and leotards reported better-than-expected first-quarter earnings, and upgraded its profit outlook for the full year. The shares rose as much as 9% in premarket trading.
But the company is still facing a raft of challenges and must stretch further, particularly by adding more products to its selection of clothing designed to be worn outside of the gym.
Lululemon effectively invented athleisure and once dominated the category. Lately, however, newer sellers, including Alo Yoga, with its trendier styles and colors, and Vuori, have been gaining ground. Meanwhile, Inditex SA’s sport and leisurewear Oysho was its fastest-growing brand last year, expanding at almost twice the rate of its flagship Zara.
Retailers from Free People to Gap Inc. to Target Corp. all have workout ranges. Because Lululemon already has the biggest market share in North American women’s apparel, according to analysts at Bernstein, expanding at its historic breakneck speed is getting tougher.
The fashion cycle is also changing. After the slim-legged silhouette reigned from around 2006 to 2016, wider pant styles are now on the rise. Looser fits were a hit in the first quarter, Lululemon Chief Executive Officer Calvin McDonald told Bloomberg News on Wednesday.
Yet the company is most associated with the sculpted legging look, and with its well-heeled customers appearing as if they just stepped out of Pilates without breaking a sweat. That doesn’t vibe with the latest TikTok trends, such as Blokecore, that are all about dressing as if you are doing actual sport. Think an Adidas three-striped hoodie rather than a Lululemon wrap top.
Many of the company’s customers are also likely to be the affluent but not uber-rich shoppers who have been pulling back on luxury purchases thanks to inflation and higher borrowing costs. $100 leggings may simply not be worth it.
Against this backdrop, the company needs to ensure it has a broad enough assortment of colors and sizes. It doesn’t want a repeat of the bag shortage of the first quarter. After the success of the Everywhere Belt Bag last year, it did not have enough stock of alternative items to pick up the slack as demand for the viral hit waned. Little wonder that same-store sales in the Americas, its biggest market, were flat in the three months to April 28.
Yet amid a sea of upstarts, Lululemon continues to have huge brand recognition. And though it has been discounting to shift excess inventory, it remains firmly premium. And, most importantly, it has successfully made the transition to workout gear that can pass for more formalwear with its ABC Pants, popular with Wall Street bankers.
Lululemon has demonstrated that it can tap into demand for the classic-but-comfortable with its men’s range, which was the fastest-growing part of the business in the first quarter. It’s moving beyond the ABC Pant with a new polo shirt, which hides the appearance of sweat and can be worn on the golf course — another area of focus — or the office.
Now it could go further in women’s wear. It has some more formal styles, yet wider-legged pants, dresses, jumpsuits and smarter jackets could make up a bigger proportion of the range. For example, it could do more with its fabric technology and design skills to create moisture-absorbent work attire that can be worn to cycle to the office and then confidently all day.
As consumers have shifted to shopping online, mid-market fashion has been hollowed out, with names such as J Crew and Gap’s Banana Republic shrinking their store bases. This leaves room for alternatives. Lululemon has a strong online and physical store presence so if it can pivot effectively, it should be able to benefit.
Given the success of the Everywhere Belt Bag, there is also a rich seam to mine in accessories. And although demand in the Americas is slowing, Lululemon’s international revenue is expanding, with same-store sales rising 29%, excluding currency movements in the first quarter.
Responsibilities being reassigned after the departure of Chief Product Officer Sun Choe, who recently left the retailer for the top job at VF Corp.’s Vans, are an opportunity to expand further into these categories. The company could even consider bringing in a top-name designer to work alongside Creative Director Jonathan Cheung. After all, the appointment of Zac Posen seems to be working for Gap.
Of course, moving more into the mainstream brings other challenges. It would be competing with a much broader range of rivals than those focusing solely on athleisure — for example, not only Zara and its quiet luxury sibling Massimo Dutti, but also more accessible luxury names, such as Ralph Lauren Corp. and Hugo Boss AG.
The risk is worth taking. The shares are down about 40% from the start of this year to Wednesday’s close.
Adding to its more flexible ranges will take time. But the fact that the first-quarter performance was not as bad as feared gives Lululemon more room to move.
