Lululemon, Gap, and Urban Outfitters: Duking It Out in Female Athletic Apparel

Female athletic apparel is hot. Lululemon (NASDAQ: LULU  ) was a trend-setter in this area with its yoga attire. However, Lululemon's appeal isn't what it used to be to investors, which pertains to its unsettling and unpredictable company culture and increased competition. The latter refers primarily to Gap's (NYSE: GPS  ) Athleta brand, which offers similar quality at lower price points. Gap generates much more cash flow than Lululemon does, which gives the company much more marketing power and a clear long-term advantage over its peer. That said, a new player has just entered the game and both Lululemon and Gap should take notice.

Without Walls
You have probably never heard of Without Walls. If that's the case, it's a new brand by Urban Outfitters (NASDAQ: URBN  ) . The brand recently opened five stores, which include locations in New York City and Hollywood, and it plans on opening five more locations.

Without Walls will offer a broad range of fitness apparel that includes graphic tank-tops and t-shirts, bright jogging pants, and sneakers. Consumers will also have an opportunity to purchase yoga mats, backpacks, and other accessories. Regardless of what you plan on buying, the stores' price points will be more similar to those of Gap's Athleta than those of Lululemon. In other words, Without Walls will be more affordable than Lululemon.

This might make you think that Lululemon has no chance over the long haul. While that's a logical assumption, it should be pointed out that Lululemon's greatest advantage is that its customers aren't just buying attire, they are buying "membership." This isn't meant in a literal sense. Lululemon's customers are treated as family, and everyone wants to belong somewhere. Therefore, the premium that must be paid for Lululemon attire is potentially justifiable.

What's interesting here is that while Lululemon will likely attract a higher-end consumer, Urban Outfitters tends to attract those who are more interested in individuality and uniqueness. This is a different target market, and it could be a big one.

Athleta's going after a broader target market, which could lead to more success but it could also backfire. Gap hasn't reported results for Athleta, but it has 65 locations already and 30 more will open soon. This is a positive sign. On the other hand, there are now some reasons to be cautious about investing in Gap.

Is it the weather?
Gap didn't impress in February. Sales came in at $929 million versus $966 million last February. Comps slid 7%. Severe winter weather might have played a role in these results but they still showed a significant decline, especially since comps increased 3% last February.

Breaking it down to Gap's three largest segments, Gap Global comps plummeted 10%, Banana Republic Global comps declined 7%, and Old Navy Global comps weakened by 6%.

It's possible that these numbers were affected by weather. On the other hand, there's no way to know this for sure, and these declines are significant.

Lululemon also might have been affected by the weather. In January, it lowered its fourth-quarter revenue and earnings-per-share expectations. It lowered its revenue expectation to $513 million-$518 million from $535 million-$540 million. It lowered its earnings-per-share expectation to $0.71-$0.73 from $0.78-$0.80. Furthermore, it expects comps growth in the low-to-mid single digits. According to Lululemon, sales and traffic have decelerated meaningfully. This is not uplifting information for investors.

As far as Urban Outfitters goes, its fourth-quarter comps improved 1%. While comps at its namesake  brand slid 9%, comps at Anthropologie and Free People improved 10% and 20%, respectively. Its namesake brand targets the 18-28 year-old demographic, and these consumers don't have as much disposable income as the consumers targeted by Anthropologie (28-45) and Free People (25-30). Without Walls should target a broad age demographic, which is a positive.

The Foolish takeaway
While Lululemon has its own established niche and it targets a higher-end consumer, it will face more competition going forward. Lululemon is likely to hold its own, but its biggest growth spurt might have been in the past. Gap's comps numbers were disappointing, but part of the cause could have been the weather. On the other hand, Urban Outfitters managed to deliver positive comps for its fourth quarter, part of which took place during severe weather.

Thanks to diversification and strong cash flow, Gap is likely to remain a long-term winner. However, Urban Outfitters seems to be the best-positioned company of the three thanks to its own diversification, its ability to deliver positive comps results in a difficult consumer environment, and its entry into a hot market while offering uniqueness at affordable prices. Please do your own research prior to making any investment decisions.

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Dan Moskowitz

Dan Moskowitz spends the majority of his time researching stocks. He believes that fundamentals, and logic pertaining to industry trends, win out over the long haul.

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Related Tickers

8/31/2015 4:02 PM
GPS $32.81 Down -0.02 -0.06%
Gap CAPS Rating: ***
LULU $64.01 Up +0.84 +1.33%
Lululemon Athletic… CAPS Rating: ***
URBN $30.86 Down -0.19 -0.61%
Urban Outfitters CAPS Rating: ****