Upscale yoga clothier lululemon athletica (NASDAQ:LULU) has had its fair share of troubles lately. The stock is down nearly 50% from its 52-week high, same-store sales are declining, and the scandals of last year are still negatively affecting the brand. Part of Lululemon's growth strategy going forward is to increase its focus on menswear, a category that represented just 13.6% of total revenue in 2013. But with the athletic-menswear market populated by companies like Nike (NYSE:NKE) and Under Armour, can a company known for $90 women's yoga pants really compete?
Last year, former Lululemon CEO Christine Day announced that the company would start opening stand-alone men's stores by 2016. With menswear making up only a small portion of sales, diversification makes sense as a way to drive growth. But with Lululemon being a predominantly women-focused brand, there's no guarantee that the brand will resonate with men.
On the company's most recent conference call, current CEO Laurent Potdevin talked about the near-term plans for the menswear business. This year, three locations in Vancouver, Miami, and Santa Monica, Calif. will be increasing the footprint of the men's section, dedicating far more space to menswear. This is the first step toward a wider rollout, and the company believes that menswear could generate $1 billion in annual revenue within a few years.
Battling a giant
Nike has one of the strongest brands in the apparel industry, and its $25 billion in annual sales dwarf those of Lululemon. While Lululemon was able to grow its women's business without too much competition, menswear is a completely different story. Nike has an extremely broad selection of products, and even with its size it still managed to grow revenue during the most recent quarter at a faster rate than Lululemon.
While Nike is certainly not known for selling inexpensive products, the company does offer a far wider range of price points compared to Lululemon. Men's shorts offer a good example: While Lululemon's men's shorts range in price from $58-$88, Nike sells men's shorts for as low as $20, with ample selection all the way up to $100. I think it's safe to say that most men would balk at the idea of paying $60 for a pair of athletic shorts, and while Nike sells lower-cost alternatives, Lululemon does not.
This is just one example, but it illustrates a fundamental problem with Lululemon's business model. The market for extremely expensive athletic wear is small -- there are only so many people willing to pay $60 for a pair of shorts. While the company has achieved exceptionally high margins so far, maintaining these margins becomes more difficult the larger the company gets.
Lululemon is relegating itself to a niche position in the industry by shooting for a 25% operating margin, and its rapid store growth is at risk of backfiring if demand for its high-priced products ends up being below expectations. Nike, a company with some serious competitive advantages, only manages an operating margin of around 13%. As Lululemon expands into the competitive menswear market, margins are going to have to decline if the company wants to have any chance at success.
A competitor with explosive growth
Another competitor in the athletic-menswear market is Under Armour, a company that grew revenue by 27% in 2013. Under Armour is a premium brand, but it still undercuts Lululemon significantly on price, much like Nike; and it seems doubtful that there's a large enough difference in quality between Lululemon and Under Armour products to justify much of a premium. Lululemon's success in its women's business has been due to cultivating the perception that its products are the best available, driving an almost fanatical level of customer loyalty, but the company is going to have a much harder time following this strategy in its men's business.
Lululemon being such a women-focused brand is a problem since its products are only sold in its own stores. Under Armour and Nike products are sold everywhere, from Wal-Mart to REI, and there's little reason for men to wander into a Lululemon store. There aren't many apparel brands, especially those as high-priced as Lululemon, that have succeeded in garnering significant customer loyalty from both men and women. Given the amount of competition in menswear and its lack of price competitiveness, Lululemon's menswear ambitions look doomed to fail.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica and Nike. The Motley Fool owns shares of Nike. 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.