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How Selling Yoga Pants Became a Great Business

Founded in Canada in 1998, Lululemon Athletica (NASDAQ: LULU  ) specializes in manufacturing technical athletic apparel for yoga, dancing and running.  Lululemon is becoming a disruptive force in the women's active-wear market, a space where Gap (NYSE: GPS  ) and Nike (NYSE: NKE  ) have traditionally owned significant market share.

In the past five years, Lululemon's revenue and income have grown at an impressive speed. Not surprisingly, since its IPO in 2007 shares have risen an amazing 447%. What makes this yoga-inspired company so special?

Source: Lululemon Investor Relations

Explaining an amazing growth story
First of all, Lululemon's focus on yoga is unique. Although there are several important players in the competitive active-wear market, none of them have a special focus on yoga. Both Nike and Gap are generalists. This is surprising, considering that last year more than 20 million Americans practiced yoga compared to 15.8 million in 2008, according to the Yoga Journal.

Put simply, the world is increasingly becoming more health aware. There's particularly strong global interest in yoga and Lululemon is taking advantage of this opportunity.

Moreover, after 15 years of building an image around concepts like healthy living, yoga, balance and diet, Lululemon has managed to establish itself as a leader in this segment. Therefore, just like Nike, it can charge premium prices. This has allowed the company to beat the Wall Street consensus for earnings per share for eight consecutive quarters.

To further consolidate its image as a yoga-culture icon, Lululemon has established strategic partnerships with spas, health clubs and yoga organizations. An example of Lululemon's great marketing is its sponsorship of the Wanderlust Festival, an event where teachers, inspirational speakers, and yoga lovers gather.

Finally, in order to maintain its amazing growth rate, the company has identified global expansion as a key catalyst. It is particularly interested in conquering Asian markets like Hong Kong and Singapore. Therefore, the hire of a promising team led by Jennifer Battersby as Senior VP of sourcing, quality and commercialization doesn't come as a surprise, as Battersby was responsible for Victoria Secret's production in Asia. 

Despite being widely recognized as the best choice for yoga clothes, Lululemon has several competitors, some of which could enjoy a free ride on the coattails of the firm's efforts to promote yoga culture.

With more than 50 yoga-related products available in various colors, Nike, the largest seller of athletic apparel in the world, is a formidable competitor. Due to its massive distribution network, Nike can reach some customers that Lululemon has not been able to reach yet.

In terms of profitability, Nike is quite enviable. Last week, Nike showed investors once more the power of its brand and the safety of its price premium, when it reported first-quarter earnings of $0.86 per share, $0.08 above the Street consensus. This took the share price to an all-time high of $75!

Another competitor worth watching is Gap, a company with more than 40 years of experience in the apparel market. The company is famous for offering top-quality affordable fashion clothes. Gap has owned Athleta, a promising women's athletic wear line, since 2008.

To attract price-sensitive customers, Athleta provides more affordable price points. According to Business Insider, while Lululemon's basic yoga pants are $98, Athleta's pants are just $69, a considerable price difference that can also be observed in other products. While Lululemon's strategy to add value consists of keeping merchandise scarce, Athleta may be more consumer friendly because it doesn't run out of inventory and keeps a large selection available.

Notice that both Lululemon and Gap are aware of the importance of international expansion. Gap plans to open 80 net new stores globally in 2013.

My Foolish take
Lululemon has shown investors how profitable selling yoga pants can be. In doing so, the company has built a strong brand among yoga lovers, which allows Lululemon to keep margins relatively high. However, its competition is rapidly increasing. Investors exposed to, or interested in, the women's active-wear market should also closely watch the performance of Gap's Athleta and Nike's yoga line.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

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9/27/2016 11:41 AM
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