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Is the Active Wear Market Too Crowded Now?

Lululemon Athletica  (NASDAQ: LULU  ) is one of the purest plays on the women's active-wear market. However, the market is quickly getting crowded. As of now, Gap (NYSE: GPS  ) is one of Lulu's latest and greatest competitors.

Athleta also offers fitness classes directly in its stores. One of the keys is that Athleta's products aren't just focused on yoga; they have products for running, tennis, golf, cycling, and swimming. Meanwhile, Lulu tends to stick to yoga-related active wear.

However, Gap isn't Lulu's only competition. The likes of American Eagle, Victoria Secret, Charlotte Russe and Guess? have all started selling yoga pants. And let us not forget the active wear leader, Nike (NYSE: NKE  ) , which is, of course, active in the market. The market is getting fairly crowded for a reason: high growth and high margins.

NPD Group pegs the total women's active-wear market at close to $15 billion. It also believes that this market is growing twice as fast as the apparel industry. On top of this, the yoga and active-wear industry also enjoys higher margins. Hence the reason Lulu has a 54% gross margin compared to Gap's 40% and Nike's 44%.

There's a lot to love
The nice thing about Gap is that it's not overly reliant on the active-wear market, making it a more diversified apparel-market play. Gap operates The Gap, Old Navy, Banana Republic, Piperlime, Intermix, and Athleta brands. It has more than 3,100 stores, with a nice blend between major brands.

In North America, around 970 Gap stores are The Gap North America, close to 600 are Banana Republic, and 1,000 are Old Navy. Around 450 stores are in Asia, and it only has 46 Athleta stores in North America, leaving tons of room for growth. Gap plans to open 160 stores this year, with a focus on Athleta and The Gap China, while also closing around 80 The Gap North American stores. 

First come, first served?
One of the big downsides to Lulu is that it's heavily reliant on the women's yoga-wear market, with a big focus on the U.S. The company is looking to make a move into men's wear and gain a presence overseas, but both Nike and Gap already operate the fast-growing Chinese market. As a result, I think Gap and Nike will have a leg up when it comes to breaking into the women's active-wear market in Asia.

Nike is the industry leader when it comes to footwear, but it's also a player in active wear. One of the big advantages to Nike is that it expects the fast-growing China market to drive sales over the next couple of years. S&P expects Nike to get $3.5 billion in revenue from China during fiscal 2015, compared to $2.1 billion in 2011.

Currently, the company is heavily weighted toward men's wear, which means there is also a big opportunity for the company to increase its exposure to women's wear.

Meanwhile, the disadvantages for Lulu continue to mount. Lulu's recent quarterly results showed that inventory was building up. But this isn't necessarily bad news for the industry, since it's more a company-specific problem. Lulu is seeing supply chain issues that have kept its summer products on store floors longer than expected. Trading at 37 times earnings, another big issue with Lulu is valuation. The company appears to be rather expensive. 

Bottom line
For now, Athleta remains a small part of the Gap business, where for the quarter-ended July, Gap's "other" segment (which includes Athleta and Piperlime) accounted for less than 5% of total sales. However, it's worth noting that the year- over-year sales growth for the "other" segment was 71% during that same quarter. 

Gap still has plenty of room to grow in the active-wear market, and the real advantage is that it has other key brands to help protect on the downside. The stock is also the cheapest, at 15.4 times earnings, compared to Nike's 25 times and Lulu's 37 times. Oh, and Gap offers a 1.9% dividend yield.

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Editor's note: A previous version of this article inaccurately quoted a former Gap employee. The Fool regrets the error.

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