Is Lululemon Athletica Built to Last?

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Growing up incredibly athletic (and modest), I never owned a pair of yoga pants. I played real sports, so Nike (NYS: NKE) made my sneakers, Adidas made my shorts, and later, Under Armour (NYS: UA) made my T-shirts.  Canadian outfitter lululemon athletica (NAS: LULU) wasn't on my consumer radar then, and since I still don't own any yoga pants, it is not on my radar now. I can't argue with the company's current success, however, so I decided to dig deeper as an investor to see if Lululemon has the legs to go the distance.

The name in yoga
Lululemon's primary target consumers are women in their thirties. The company is focused almost solely on yoga and running gear, though it is slowly branching out to dance and gymnastics. This is a contrast from companies that sell a variety of products, like Nike and Under Armour, and it can trouble investors who value diversification and don't know anything about yoga.

As it turns out, according to the National Sporting Goods Association, yoga participation boomed in 2010, growing 28% from 2009 to a total of 20 million people in the U.S., though that number includes people who only tried the sport once or twice.

Inside view
Admittedly, yoga is more popular than I realized. But are all these yoga fans really wearing Lululemon?  I contacted a friend of mine, a marketing director at a nonprofit who moonlights as a yoga instructor, to get a better idea.

My friend, whom I'll call Charity Fitbottom, said that Lululemon's gear is very high in quality, but that it's also "prohibitively expensive for many people, which is a bit of a contradiction to some of the principles of the yoga way of life." Ms. Fitbottom went on to say that while a lot of participants wear clothes from more affordable places like Target (NYS: TGT) or TJX (NYS: TJX) flagship TJ Maxx, depending on the yoga studio, she may see as many as 30%-40% of her students outfitted exclusively in Lululemon.

Pricing power
If a company with "prohibitively expensive" products can find a niche, as Lululemon seems to have done, it can result in some pretty outstanding profit margins. Look at these numbers from 2010:
 

Company

Gross Margin

Operating Margin

Net Margin

Lululemon55.5%25.6%17.1%
Nike45.6%13.5%10.2%
Under Armour49.9%10.6%6.4%
TJX26.9%10.5%6.1%
Target29.8%7.8%4.3%

Source: Capital IQ, a division of Standard & Poor's.

Lululemon keeps more than 17% of every dollar it makes in sales. That number is pretty impressive compared with giants like Nike and Under Armour, but can a company with expensive discretionary products survive when times get tough?

It takes a village to afford a wardrobe
Lululemon did fare well during the most recent financial crisis, even if its stock didn't. So how is it that a yoga-inspired sportswear company can be so successful at being so expensive?

Ms. Fitbottom explains: "Lululemon does a good job of connecting the yoga community. They give back by offering free yoga classes fairly often, and offer store space for teacher trainings and workshops. It also gives space for local studios to promote themselves."

Essentially, the company has injected itself into the yoga world and mastered the art of customer loyalty.

Fit bottom line
It's not easy being a bricks-and-mortar retailer in this day and age, but by weaving itself into our communities, Lululemon is able to entice consumers to pay higher prices for its gear. Combined with its ability to weather economic doom and gloom, Lululemon is positioned well for long-term growth.

At the time this article was published Fool contributorAimee Duffyowns shares of Under Armour. The Motley Fool owns shares of Under Armour and Lululemon Athletica.Motley Fool newsletter serviceshave recommended buying shares of Lululemon Athletica, Under Armour, and Nike, as well as creating a diagonal call position in Nike. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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