Gross Margin Decline at Lululemon has Just Begun

Lululemon's lack of a competitive advantage for it's premium pricing products will force gross margins to decline as the woman's athletic apparel market matures.

Apr 12, 2014 at 6:41AM

Lululemon Athleticas (Nasdaq : LULU) ability to capitalize off of women's athletic apparel growth has catapulted it's stock in recent years. The company's success has prompted competitors to enter the market, which is starting to put pressure on its premium pricing. With the lack of a sustainable competitive advantage, the company's gross margins will likely shrink to resemble competitors Nike (NYSE : NKE) and Under Armour (NYSE : UA). Foolish investors holding Lululemon stock risk losing their shirt since the company's Ecommerce sales strategy should accelerate Lululemon's poor competitive positioning in the maturing woman's athletic apparel market.

Woman's athletic apparel
Lululemon sells performance apparel and accessories to a primary target market of women with an active lifestyle, with items including fitness pants, shorts, tops and jackets. Lululemon competes directly against wholesalers and direct retailers, established companies expanding their production of athletic apparel, and retailers specifically focused on women's athletic apparel.

Nike and Under Armour are both established companies with the operating capability to compete heavily against Lululemon. Under Armour has primarily attacked the men's market since it came on the scene, but is currently pushing into the women's market, which explains the recent sponsorship deal with top ballet soloist Misty Copeland. While it may be tough for Under Armour to break signifigant ground, Nike's brand has the potential to provide Lululemon troubles.


Pants comparison
Women's preference for comfortable moisture wicking material helped Lululemon differentiate itself in the early stages, allowing it to charge a premium. Its woman's yoga pants range from $82 to $98. The "Wunder Under" cotton pants are priced at $92. The cheapest Luon-fabric pants are made of 87% nylon and 13% Lycra, and are priced at $82.






87% nylon/13% lycra spandex

Under Armour





wicking polyester/spandex



92% nylon/8% lycra spandex



88% nylon/12% lycra spandex

Lululemon's pants are approximately $20 -$40 more than the Under Armour "PERFECT SHORT PANTS" and $30-$50 more than Nike's "Legend slim Dri-FIT pants" which are shown below. The Prana yoga pants are very similar in fabric as Lululemon's, and are about 50% cheaper. Lululemon's competitors' adjustment to women's preferences at a much lower cost will likely precipitate a price drop.

Ua Pants

No sustainable competitive advantage
Since the ability to charge a higher price is constrained to competition, abnormally high prices are only sustainable if a product has a competitive advantage through branding, quality, or technology. Since Lululemon owns no patents or intellectual property rights in the technology, fabrics or processes underlying the products, competitors are able to manufacture and sell similar products at discount prices.

Lululemon's ability to charge a price premium has primarily come from its branding to women. This brand strategy benefited the company in previous years since yoga and an active lifestyle became popular, but as the industry matures and the target market is more aware of better-value options, the brand value will likely cease to provide a competitive advantage. Whats more alarming is that the women's branding strategy will likely pigeonhole it as the company diversifies into male product markets.

Gross profit margin
A large gross profit margin is achieved through higher pricing or lower product costs. As Lululemon's pricing premium is pressured, its gross margin will likelyfall. This appears to have started, as the company's gross profit margin decreased approximately 3% to 52.8% in the most recent fiscal year. According to Lululemon's 10K, the decrease resulted primarily from a lower sales mix of higher margin core items, along with higher markdowns.





























Nike and Under Armour's 2013 gross margin of 44% and 49% is well below Lululemon's 56% margin. Nike's margin averaged approximately 45%, and was very stable over the past five years, which makes sense since it is a much older company. Under Armour averaged approximately 49% over the past five years. It is likely that Lululemon's margin has been stronger than Under Armour's margin because Under Armour has had to intensely compete against veteran Nike since it started. As the woman's apparel market matures, Lululemon's margin should decline to mirror it's peers.

Lululemon's strategy to grow Ecommerce sales will be a catalyst for decreasing gross margins because the Internet provides a more transparent product comparison relative to direct-to-consumer and in-store sales. At the Lululemon sponsored yoga classes and stores, you will not find info on competitors products and pricing. Ecommerce will make current and potential Lululemon customers more willing to shop around for product attributes and pricing since it only requires a couple minutes of Internet searching.

Foolish takeaway

Lululemon has benefited greatly from women's athletic apparel growth, but as the industry matures, the companies only competitive advantage will dilute in value and force a price decline in many of it's products. Foolish investors should beware because the Ecommerce sales strategy should accelerate the difficult competitive position which will drive the company's gross profit margin to lower levels.

christian sgrignoli has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica, Nike, and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information