NEW YORK (TheStreet) -- When a company under-delivers or over-delivers on its quarterly earnings relative to Wall Street's expectations, it's vital to determine whether the performance was fundamentally driven.
When it comes to yoga apparel maker Lululemon (LULU - Get Report), the company's business model of selling premium apparel inside of relatively small square footage retail stores is flawed. Such a model worked great in Lululemon's infancy since it was basically the sole specialty apparel retailer selling yoga-themed gear in malls. However, with financial success came a competitive onslaught that prior management didn't properly anticipate, and new management may not fully appreciate.
The market Lululemon competes in (yoga/women's athletic apparel) hasn't died and, in fact, remains one of the hottest in the physical mall and online. But new entrants have blurred the line between yoga gear and athletic apparel. Lululemon was able to fetch exorbitant prices for its swag early its lifecycle as women's performance apparel lines from the likes of Nike (NKE), Under Armour (UA), Adidas, and even Macy's (M) private level brands had long been afterthoughts. To consumers, Lululemon was offering a badly needed, high quality option for people striving to live healthier and active lifestyles. Price points mattered little.
Given the increased number of offerings from major companies with stronger supply chains than Lululemon, products from the yoga-apparel market have been lumped in with the athletic wear category in the minds of consumers. In other words, the technical details built into Lululemon's merchandise are being drowned out by cheaper, eye-catching alternatives.According to research firm Trefis, the global sports apparel market, including women's activewear, is estimated to grow to $178 billion by 2019. Within that fast-growth backdrop, Lululemon simply doesn't have the operational capabilities to compete with Nike and Under Armour which are churning out strong seasonal product to larger wholesale accounts. Shares of Lululemon, despite the stock falling hard on two occasions twice over the past six months, continue to trade on relative premium multiples to peers in specialty retailing on the assumption the company is a share gainer in its respective industry, and not a user of sharper price points and incentives to attain that share gain. What Exactly Are Competitors Up To? Amid Lululemon's struggles, the competition is thriving, underscoring the fundamental issues that the yoga-apparel purveyor is up against. Consider these two stats:
- In 2013, sales of Nike women's training product reached $1.1 billion globally, up 6% year over year.
- Under Armour entered 2014 boasting a women's business throwing off $500 million a year in sales. CEO Kevin Plank has guided Wall Street to a female business that generates $1 billion in revenue by 2016.
Compare that to Lululemon's same-store sales which, excluding online, have declined for two consecutive quarters. At a fall of 2% in the first quarter of 2014, the company's same-store sales are a far cry from when it last posted a double-digit percentage increase of 10% in the fourth quarter of 2012.
Requests for comment from Lululemon on its current market share position in the industry went unanswered. Two Suggestions to Fix Lululemon Wholesale door expansion: Lululemon must swallow its pride and forego some of its in-store theater (stores still hold yoga classes) and open shops on the floors of high-end department stores such as Nordstrom (JWN) and Saks, along with integrated Web experiences. Shops should be staffed with Lululemon employees as to preserve the brand's DNA (sort of along the lines of what's happening at Best Buy (BBY), with key vendors Sony (SNE) and Samsung training "Blue Shirts" in selling top quality product). Private label introduction, men and women: Lululemon should introduce a private level brand for men and women priced slightly higher than those already being offered at Macy's and J.C. Penney (JCP). Having technically superior Lululemon product at a reasonable price should lead to market share gain from the brands. The trick for Lululemon would be to remove enough technical details from the product as to not send those that love its name brand to Macy's and J.C. Penney. View from Ground Zero Since 2012, Nike has opened 114 shops at Dick's Sporting Goods (DKS) (shops now exist in 50% of stores) and Under Armour has opened 131 at Dick's (shops now exist in 42% of stores). At roughly 4,000 square feet, these shops are selling best-in-class athletic apparel products from household brands, essentially making consumers forget that Lululemon is in business. Dick's Sporting Goods' big box retailing model attracts a good deal of year-round traffic, and customers are now being visually hit with Nike and Under Armour shops as soon as they enter the store. Nike and Under Armour haven't stopped there -- they have penetrated the sales floor of Macy's with core black workout pants priced $20-$30 below that of Lululemon's bread and butter (its supremely high margin) black Luon pants. In addition, private label and new upstart athletic apparel brands are popping up at all of the major department stores at compelling price points. So welcome to Ground Zero. Here is what the typical consumer sees while navigating the athletic apparel aisles. Nike and private labels forming a wall of defense against Lululemon's initiatives. First thing a consumer stumbles into at Dick's Sporting Goods is usually the new Adidas athletic apparel section. Also something to keep in mind is that Lululemon isn't giving its consumers a complete wardrobe option at its stores. At Dick's Sporting Goods, there has been an explosion of brand name accessories along the outer walls of the selling pad, complementing an easy trip to the nearby sneaker section. One-stop shopping at its finest.
This is the new Under Armour female athletic wear shop at Dick's Sporting Goods. Notice the bright colors, and the more technical aspects of the product. It helps that Under Armour has become the daily wardrobe of choice for teens; entire households of devotees are forming. Lululemon Gives You an Object Lesson in Investing 101 3 Secret Signs of Highly Effective Leadership Why are Sales of Depend Incontinence Products so Strong?
Check Out Our Best Services for Investors
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Model portfolio
- Stocks trading below $10
- Intraday trade alerts