Will Lululemon's Loss Be Athleta's Gain?

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Yoga pants aren't just for yoga anymore. Women wear them to the grocery store, around the house, and while grabbing an early-morning coffee with friends. As athletic wear has become acceptable to wear for daily errands -- after all, that woman could very well be on her way to the gym -- trendy athletic clothing providers seem to be springing up everywhere.

Tough times for Lululemon Athletica

When it went public in 2007, Canadian retailer Lululemon Athletica (NASDAQ: LULU) seemed to be the one to watch. The company had been recognized by the Retail Council of Canada as being an innovative small business and its CEO was former Reebok CEO Robert Meers. But, a small snafu with its reusable bags in 2010 was only the beginning.

An unfortunate see-through pants event earlier this year followed. The problem wasn't simply that the company sent out a batch of pants that had an "unacceptable level of sheerness." The problem was that "pantsgate" was the fourth quality-control issue for the company in a year. Because the problem impacted 17% of its yoga pants, Lululemon warned investors that the recall could cost the company $40 million during the second quarter.

Lululemon's first quarter, meanwhile, brought higher-than-expected earnings, with CEO Christine Day announcing earnings per share of $0.32 on revenue of $345.8 million. Revenue was up more than $60 million from the same period last year, but earnings per share remained stagnant.

But the big surprise in Lululemon's earnings report was that Day was stepping down as CEO, resulting in a steep drop in shares of the yoga apparel-maker. Lululemon's recent problems are only part of the equation. The company has been facing stiff competition lately, as other elite apparel retailers realize the value of stylish workout apparel for women.

Athleta steps up

Gap (NYSE: GPS) has been expanding its elite workout brand one store at a time. When the company opens a new Athleta store, it takes the aggressive approach of locating it close to a Lululemon shop, offering similar items for a slightly lower price.

But when it comes to high-end yoga apparel, Lululemon is still the one to beat. Lululemon reported $1 billion in earnings last year, compared to Gap's $301 million for both Athleta and Piperline.

VS joins the fray

But when it comes to casual wear for young women, Limited Brands' (NYSE: LTD) Victoria's Secret is emerging as a popular alternative. Its lounge wear can already be seen in dorm rooms around the country and now the company has decided to get into the luxury workout apparel business. Available as part of its VSX and Pink lines, Victoria's Secret is now offering a full line of yoga apparel.

Now that VS is separating its Pink line into separate stores, the company will have an even greater need for products that lure customers in. Limited Brands announced a 14% increase in net profit for the first quarter for its brands, which include VS and Bath and Body Works. However, the company's growth slowed in the early part of 2013, due in part to lower demand for apparel during the after-Christmas season.

Adding yoga apparel to its Pink line could give Limited Brands the boost it needs for its Victoria's Secret section. As Pink increases in popularity with teens and college students, the company could have what it takes to take on both Lululemon and Athleta.

So far, Lululemon has seen great success at focusing solely on yoga apparel, but for Gap and Limited Brands, yoga apparel is only one part of their thriving operations. Since Gap announced $15.7 billion in net sales for 2012 and Limited Brands brought in net sales of $10.4 billion last year, Lululemon has stiff competition.

Lululemon has the potential to grow its sales by 10 times if it can penetrate its other markets like it has in Canada, but the competitive landscape is starting to increase. Can Lululemon fight off larger retailers and ultimately deliver huge profits for savvy investors? The Motley Fool answers these questions and more in its most in-depth Lululemon research available. Thousands have already claimed their own premium ticker coverage; gain instant access to your own by clicking here now.


Stephanie Faris has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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