The lines are blurring between luxury and casualwear. Streetwear brands like Supreme, Cotton Citizen, and Hanesbrands' (HBI 1.80%) Champion are finding a huge market for premium, limited-edition hoodies and sweats. Demand has been particularly strong with high-earning millennials who are seeking out quality clothing from niche apparel brands. The streetwear and athleisure trends have played important roles in the explosive growth of top athletic-wear brands lately, including lululemon athletica (LULU 1.93%).
Last year, global sales of personal luxury goods grew 6% to reach $284 billion, according to Bain & Company, and the market is expected to continue growing through 2025. Over the last few years, streetwear has been a crucial driver of growth in luxury goods, and Lululemon sees an opportunity to get in on the action.
Lululemon just launched its first streetwear brand called Lab, which is available online and in select stores. Because Lululemon already serves a demographic that is willing to drop nearly $100 on a pair of yoga pants, it is perfectly suited to make a splash in the luxury-streetwear market and expand its addressable market.
Lululemon hopes to capture a piece of the booming streetwear market with its new Lab collection. Image source: Lululemon Athletica.
Why streetwear?
Lululemon Lab has been around for many years as a sort of playground for the company to test new designs and concepts. But as Lululemon enters new markets around the world, it is finding customers who want more exclusive and unique products, as Lululemon's Chief Product Officer Sun Choe explained to Fast Company: "As we grow internationally, we know that exclusivity is something that is very important in Asia and Europe."
As part of the initial collection, Lab features a line of clothing that is strikingly different from Lululemon's core assortment. Items are available for men and women, and some pieces are unisex. Overall, the assortment is very forward-thinking, minimalistic, and pricey. Currently, the most expensive item is the $398 Ashta Shell Jacket, and the lowest-priced item is a $78 sports bra. There are also several styles of pants that hover around $168 to $178, much higher in price than Lululemon's standard styles for women that are $98.
With Lab, Lululemon is following a trend of luxury goods companies that are starting to target what's referred to as the HENRYs (high-earners-not-rich-yet). Research from Deloitte finds that HENRYs have an average age of 43, a six-figure income, and less than $1 million in investable assets.
Streetwear is having a significant influence on fashion these days. The new generation of high spenders, or the HENRYs, don't value traditional luxury like fine leather goods. Instead, they value quality and resale value, according to Deloitte, and they want to buy from unique brands that stand out.
This seems to be the demographic Lululemon Lab is targeting. Lululemon has grown phenomenally well over the years based on the perception of its quality product, which should serve it well in the premium streetwear market. Moreover, the limited-edition items in Lab should satisfy the desire for resale value and a one-of-a-kind product that millennials are seeking.
Margins should be healthy
Looking at the financial side of things, chasing the HENRYs could spell an opportunity to push up profit margin. Pants are the highest-margin product for Lululemon, and since the pants offered in Lab are over 50% more expensive than Lululemon's core pant styles, management is clearly aiming for a healthy profit.
If Lab is successful, it would be the icing on the cake for an apparel store that continues to post stellar growth every quarter. Lululemon has been on the offensive lately, launching an innovative new store format and expanding its addressable market with new product categories. Adding up the opportunity in athletic apparel and the new skincare category comes to a total addressable market of $630 billion, according to Lululemon's investor day presentation earlier this year.
The yoga-inspired retailer has tripled its addressable market in the last year, which will no doubt expand even further with the addition of luxury streetwear. Given all of these opportunities, it's understandable why investors love the stock, currently trading at a high price-to-earnings ratio of 34 times next year's earnings estimates.
