Lululemon Athletica Needs to Step It Up

Lululemon Athletica has been falling down for over a year, and the competition is starting to move in.

Jun 2, 2014 at 9:30AM

For the last two years, lululemon athletica (NASDAQ:LULU) has been a tale of two different companies. On one side, there's a pretty solid financial machine, one that pumps out gross revenue over 50%, increasing earnings per share, and a rock solid cash position. Taken out of context, it seems like everything is coming up roses. But on the second side, Lululemon is increasingly looking like a business that's out of touch with its customers -- customers that have lost faith in the brand's products.

That lack of faith has started to pull on Lululemon's results. The rising earnings and strong gross margin are rising more slowly and showing less strength. Competitors can smell blood in the water, and Lululemon only has a little time left to make it safely back to shore.

Value in your workout
There's been a trend lately where people who exercise like to rub it in your face everywhere you go. Maybe it's not that obvious, but street style has had a major change in the last few years. More people are wearing their workout clothes as everyday clothing. The New York Times spotted a similar trend back in 1986, but with designers incorporating gym clothing in other designs. Now, were just wearing the gym clothing out.

And why wouldn't we? Running shoes can set you back hundreds of dollars, Lululemon pants come in at a cool $98, and Under Armour (NYSE:UA) hoodies start at $50 and work their way up from there. Spending that much money on clothes that only your fellow gym rats get to see isn't the American way -- when it comes to expensive stuff, we want everyone to see.

The increasing demand for fitness fashion is putting Lululemon, Under Armour, and Nike (NYSE:NKE) in a competitive mood. When Lululemon took a hit on sales last year, Under Armour swooped in to pick up disaffected customers. The difficult part of the Lululemon puzzle to assemble has always been its community involvement, but competitors are starting to figure that out, too.

Building a place for your dollars
Lululemon's stores have always been a place for their customers to come get more than just a pair of pants. The locations offer hemming, classes, and group activities in order to grow the yoga community. For Under Armour and Nike, that's been a difficult act to follow. The companies run fewer of their own stores, selling mainly through major retail outlets.

In North America, Lululemon runs about 250 stores, while Under Armour has just over 100, and Nike manages about 200 Nike brand stores. In terms of revenue dependence and ability to reach out to the community, Lululemon has the upper hand.

But Nike and Under Armour are making a push for more in-store events. Under Armour is beginning to launch Brand House stores where customers can get individual advice and meet other athletes. Nike is focusing on growing its community of female athletes with its Training Clubs. These groups combine products and specialized sales people to get customers into a community of Nike-branded athletes.

Lululemon is on the back foot coming into its next earnings release. The competition is making moves on its very specific space, and the competition isn't a bunch of ragtag brands. Nike and Under Armour know how branding works and they can see that Lululemon -- and its hugely profitable customer base -- is up for grabs. Lululemon needs to get back into its community, regain the trust of its customers, and start clawing some of its sales back. If that doesn't happen, Nike and Under Armour are simply going to take everything it's built and smash it to the ground.

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Andrew Marder 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.

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