Can Lulu Compete? Does it Have To?
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I don’t think the stock pundits really get Lululemon Athletica Inc. (NASDAQ: LULU). They make fun of yoga and it’s all very sniggery and sophomoric while they make claims that Lululemon is competing directly against Under Armour Inc and Nike, especially now that they have branched out into men’s, running, biking and swimwear lines. And that in a Zen-like way is what they don’t get. Lululemon is about not competing. Yes, it was sort of a koan -- that is a zen question for which one has to look inward for the answer. Lululemon is not really a competitor against the big athletic wear names.
The Lululemon Lifestyle
Lululemon serves a totally different customer base than the other two. This has always been the disingenuous part that athletic wear is just athletic wear. Lululemon is a lifestyle brand of a certain kind of woman -- affluent, independent who still wants to look attractive and be fresh (the no-stink fabrics are very appealing to women) while becoming fit. And the new sportslines for swimming, running and biking are still individualistic and can be solitary or team activities. These are more collaborative than competitive endeavors. Just comparing the websites and stores of these three shows the companies at least "get" their target consumer.
The Under Armour (NYSE: UA) website is aggressively competition-themed. It’s all clenched fists, grimaces, glares, very basic colors, blood red, industrial black. Even the female models look menacing and the shoes featured look like they are designed for a futuristic butt-kicking. Everyone is spoiling for a fight. The message is loud and clear: our clothes are for serious, fierce, extremely competitive athletes who will do just about anything to win and you’ll win too, if you wear our clothes.
The Lululemon vibe is much gentler, less confrontational and competitive, lighter and brighter. The Lululemon demographic appreciates the opportunity to exercise individually or on a team but in a non-threatening way. For example, like all the Lululemon stores that offer free classes and workshops, my nearest Lululemon (situated next to the Apple store on primo real estate in super-affluent Bethesda) is currently offering free training workshops for the Sea Wheeze half marathon. The emphasis is very much on doing things at your own pace in your own way, which may account for the 24% increase in same store sales recently. The Lululemon blog has women taking pole dancing and ballet classes in the attire, not just yoga or pilates.
Lululemon also reaches out into the community and distributes its clothes through yoga and exercise studios and has many community outreach projects. That is not to say that Under Armour is some dark villain compared to the delicate flower Lululemon. Under Armour has been a godsend to Maryland with its many scholarships, community athletic initiatives and jobs. It just tries to project a more driven, aggressive and competitive image to its target customers.
The brick and mortar stores continue the same subliminal message; the Under Armour outlet store in Virginia is dark, brooding, extremely masculine. The Lululemon store is bright and airy with stained glass.
Under Armour really competes most directly with Nike (NYSE: NKE) as the competitive underdog with the heart of a champion who has the will and drive to win. UnderArmour even offers baby onesies that say "Born Winner."
Nike can indulgently view these Johnny-come-latelies at its own peril. Lululemon’s men’s line is taking baby steps and their biking, swim and running lines are in nascent stages. But Nike’s women’s clothing is boring, all primary colors and it doesn’t have the no-stink fabric either. Nike’s version of yoga pants (and whose brainchild was this?) sports horizontal stripes. Really?!!
Nike’s clothing line is only a small percentage of sales. It is still really all about the shoes. They have a new Hyperdunk+ athletic shoe that synchs with your mobile device to measure the efficacy of your moves and give you training feedback. Supercool, I must admit. The Nike image is still targeted to the serious athlete, “Nike+ lets you compete with yourself, your friends, your community—the world.”
Each company has a particular demographic, a compelling stock story, superior performance and as to upside each has its arguments. The potential Lululemon customer is underserved. There are only 174 Lululemon stores in the US, Canada, New Zealand and Australia combined. The potential for expansion is amazing as the growth of yoga, pilates and other non-competitve exercise is exponential. Remember, their target customer is affluent; she has the time and wherewithal to drop on yoga classes and yoga clothes. Nike’s and Under Armour’s products are the same approximate price points. Quarterly revenue growth is 53% year over year. The forward P/E is 26.77 and the stock has pulled back lately and has 25% of the float short.
As for Under Armour, CEO Kevin Plank has brought the company from a University of Maryland dorm room enterprise to being a Super Bowl advertiser, with its memorable campaign, “Protect This House” launching their shoes. At that time analysts were downgrading the stock saying the shoes and the Super Bowl campaign were a waste of time and money. Under Armour split its stock on July 10 and has come down a little from 52-week highs. The P/E is 30, the quarterly revenue growth is 22.90% year over year. And the short share of the float is 9.4%. Under Armour reports July 24.
Nike’s recent comments from management indicating slowdowns in China brought down the stock as well as other stocks exposed to China amid concerns of slowing profitability. Nike has a 1.50% yield, a P/E of 19.67 and a five year PEG of 1.54. The quarterly revenue growth is 12.20% year over year. It is currently trading in the middle of its 52-week range. Still it has some exciting new products and the London Olympics ahead. I have no doubt Nike will continue to execute and innovate.
Who’s The Winner
As I said before it’s not about competition. I think all three are "winners." It just depends on what you think the purchasing power of each intended demographic will be going forward. You can probably tell I like the prospects for little Lulu, but I’ve had money in Under Armour before and probably will again. As for Nike there are American big caps I like better that are less exposed to Europe and China but good news on those fronts will surely lift Nike like its Hyperdunk+ shoes.
leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Lululemon Athletica, Nike, and Under Armour. Motley Fool newsletter services recommend Lululemon Athletica, Nike, and Under Armour. 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. If you have questions about this post or the Fool’s blog network, click here for information.