Premium activewear brand Lululemon Athletica (LULU 1.31%) has changed the way people view and wear gym clothing, contributing to the rise and normalization of athleisure. It's done that through a powerful combination of quality, patented fabrics, seasonless designs, premium pricing, and devotion to a sense of community and brand-building, all underpinned by its innovation culture.
Its most recent product launch is an under-the-radar collection that could completely change its underlying business. Yet, as much of a shift as it is, management hasn't made much noise about it. Let's see what Lululemon is doing and why investors should sit up and take notice.
Moving into new categories
Since Lululemon makes activewear, you might be surprised to see woolly sweaters and casual slacks on its women's product list. This move into clothes outside of activewear is an obvious pivot from its core selection of yoga pants and cropped tops, and most of these products are under a category called "Fall Clothes."
This isn't an entirely new concept. Lululemon has had incredible success with its men's dress pants, which are made of patented stretch fabric, and, as it describes most of these types of products, made to be "on the move."
But now it's bringing the concept into women's fashion, and it's a stretch (pun intended) to see how an oversized soft turtleneck can be streamlined into an activewear collection. This is a massive shift away from its core mission of performance athletic wear. The way it seems to be tying it together is that the new collection is all made with this "on the move" feature, with women's dress slacks featuring a pull-on, four-way stretch fabric.
On the second-quarter conference call, CEO Calvin McDonald said: "In women's, we will launch an exciting new collection in the fall, which will show our continued ability to address the unmet needs of our guests. Stay tuned for additional details." He described some new products as "designed for lounge, but made from technical fabric and offer[ing] performance features."
Meeting new needs and increasing awareness
The company sees it as part of its unique proposition to "raise the bar" in its core active categories "while also testing and learning in new categories." On the second-quarter call, one of the analysts told McDonald that "[every] time you get on a call, there's like another list of five new things that we didn't know about."
Lululemon has made its way to the top by anticipating and capitalizing on trends. After athleisure became the uniform of the at-home work force, office apparel is making a comeback. Not one to sit on the sidelines, Lululemon is testing out this area and seeing how it can incorporate styles into its framework.
On the call, McDonald mentioned meeting "unmet needs" several times, and also talked about increasing brand awareness. These appear to be the two goals filled through releasing this expanded product line. Unaided brand awareness is still at only 25% in the United States, and single digits outside of the U.K., North America, and Australia.
By introducing new products to customers not already familiar with Lululemon, it can bring them into the ecosystem and build relationships that can generate higher sales.
Some potential downsides to consider
The main downside I see is the potential dilution of the brand. Lululemon is probably the top premium activewear brand right now. If it leans too much into women's fashion, that could increase sales in the near term but ultimately lead to it becoming just another fashion label. That's not necessarily a bad thing, but it's a different company, and investors need to consider the implications of such a pivot.
The short-term repercussions of this not being successful don't concern me as much. Lululemon, and most successful companies for that matter, need to innovate on a regular basis to stay current and generate growth. It's a fine balance between operating a core business and expanding just the right way to enhance the brand and mission without straying too far. Nike is a master at this, and it doesn't go anywhere near women's fashion apparel.
If this bid doesn't take off, Lululemon goes back to its basics and moves on. It's a small enough endeavor to close it down, and the company has the capital to try these new moves without worrying about failure. For example, it took a chance on purchasing connected-fitness company Mirror at the height of the pandemic, and in the aftermath that hasn't worked out. Previous market darling Peloton, for example, is picking up the pieces of its own ill-fated connected-fitness business.
Keep your eye on the yoga mat
For now, this is a small capsule collection, and it isn't worrisome or an earth-shattering change in its current form. Lululemon is increasing sales and earnings and has a wide-open runway. It operates a lean business with many growth catalysts as is. I don't see this as even a yellow flag, but if you are a shareholder or are consider buying Lululemon stock, it's something to note and follow.
