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July 24, 2024
Are Emerging Upstarts Challenging Lululemon’s Growth?
An analyst from Jefferies lowered his price targets on Lululemon due in large part to threats from athleisure upstarts Alo Yoga and Vuori. The analyst Randy Konik believes Lululemon is mimicking past mistakes by Under Armour and Coach.
In a note attained by RetailWire, Konik said Under Armour’s sales slowdown from consistent double-digit quarterly growth to single-digit gains or declines starting around 2017 can be traced to fashion shifting from performance-athletic to fashion-athletic style, Adidas gaining share, and management taking its focus off core apparel offerings due to the brand’s entrance into footwear and MapMyFitness acquisition.
“[Lululemon] is exhibiting similar issues,” wrote Konik. “1) Data shows [Lululemon] losing incremental share to Alo/Vuori, 2) fashion in bottoms is shifting to wide-leg (not a core for [Lululemon]), and 3) entrance into Mirror and footwear are mistakes in strategic direction.” The result, he added, is that Lululemon’s total sales growth average of over 30% for the last 12 quarters “slowed to near 10% today.”
In a separate note, the analyst wrote that while Coach, known for its handbags, was able to nearly double its revenue from 2007 to 2013, Michael Kors was able to eclipse Coach’s sales volume by 2015 due to product innovation, market positioning, differentiated celebrity endorsements, and aggressive retail expansion.
Alo Yoga and Vuori could have a “Kors Effect” on Lululemon, according to Konik, as both brands are generating healthy momentum based on expanding website visits and aggressive store openings. Both brands operate 85% to 90% of their stores within a half mile of a Lululemon location. Konik said, “While Alo and Vuori are still in the early stages of their growth trajectories, we believe both of these brands could serve as LULU’s key competitors over the next several years.”
Larger competitors, particularly Nike and Adidas, have long been seen as the primary threats to Lululemon’s growth.
Konik said Lululemon is also facing slower growth in the North American sportswear market.
Another skeptic of Lululemon’s growth is Chip Wilson, the chain’s founder who has become its loudest critic since stepping down from the retailer’s board in 2015. In an interview with Forbes in January of this year, Wilson said he believes diversity pushes are working against Lululemon’s ability to differentiate in the marketplace.
“They’re trying to become like the Gap, everything to everybody,” said Wilson. “And I think the definition of a brand is that you’re not everything to everybody.”
Jefferies’ note arrived as Lululemon reported that its first-quarter fiscal 2024 results topped expectations while delivering weak second-quarter guidance. Sales in the Americas in the first quarter slowed to a gain of 3%, versus a 17% jump in the year-ago period.
On its first-quarter analyst call, Lululemon’s CEO Calvin McDonald said Lululemon saw a “slower start” to the year due to “some ongoing choppiness in the consumer environment,” but also internal factors, including shortages in colored leggings, small sizes, and two-toned tote bags. Sales are still expected to grow by 11% to 12% for the full year. McDonald said, “With the lead times, we expect to be in a more optimal inventory position in the second half of 2024.”
Discussion Questions
How should Lululemon be addressing the threats presented by Alo Yoga, Vuori, and other smaller competitors?
What unique challenges do emerging competitors present versus larger competitors like Nike?
Do you see any signals that Lululemon’s growth will slow this year?
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The biggest problem for Lululemon is that more retailers and brands are moving onto its turf in a bid to capture a slice of its success, and sales. At the higher end of the market, for example, brands like Vuori have opened more stores and Free People Movement is expanding into more doors. This gives consumers more choice and allows them to add variety to their closets – which many seem keen to take advantage of. The good news for Lululemon is that, from our data, very few American shoppers are abandoning it completely in favor of other brands. They are simply sharing their spend on athleisure more widely.
Two further things need to be considered. First, growth was always going to slow because it would be impossible for Lululemon to keep up the exceptional pace of revenue expansion. Since 2019, the business has grown sales by 141.7%. You can’t keep churning out that type of growth. Second, most of the problems are in North America, where Lululemon is more mature, it still has a lot of international opportunities.
I am also adding a note on Coach and Michael Kors, as this is mentioned in the article as a warning for Lululemon.
Yes, Michael Kors did once overtake Coach because it was more aggressive. However, that aggression and over-expansion ultimately cost it dearly because its products became ubiquitous and damaged the brand. Look at the revenue growth of both brands for their latest fiscal years compared to 2019:
Michael Kors: -15.2%
Coach: +16.1%
Michael Kors parent, Capri, also made a $229 million net loss in its latest full fiscal. Coach’s parent Tapestry, by comparison, made a net profit of $936.0 million.
So, pitching Lululemon as the equivalent of Coach in this instance is just weird. Coach is the ultimate winner. Michael Kors is a hot mess.
It seems everyone wants a slice of Lululemon’s pie. The Michael Kors comparison seems off. Kors went wild with ill-conceived licensing programs and aimless wholesale distribution. Its recent pare downs are hopefully not too little too late. Lululemon seems to be mired in a Nike-esque situation more than anything. Underplaying key market segments and sticking with its knitting on the trend side while placing bets on Mirror (fleeting technology?) and footwear (a whole ‘nother world). Even so, Lululemon doesn’t deserve a thrashing. It’s a mature business in the US with room to grow elsewhere. Diversification is a necessity rather than a nice-to-have these days but, with so many possibilities, setting priorities and maintaining focus will be job one (and two).
Lululemon should focus on its core strengths in performance and innovation, streamline its product offerings, and enhance the customer experience. Investing in unique brand elements, avoiding over-diversification, and reinforcing brand identity can help counter the threats from rising competitors like Alo Yoga and Vuori. These brands pose a significant challenge to Lululemon with their agility, niche focus, and strong community ties. To counteract this, Lululemon must remain nimble and closely aligned with consumer needs and preferences.
There is a competitive pressure that include Lululemon’s market share loss to Alo Yoga and Vuori, with sales growth slowing from over 30% to 10%, and North American sales growth dropping from 17% to 3% in Q1 2024.By doubling down on its core competencies and refining its brand strategy, Lululemon can navigate the competitive landscape more effectively and regain its growth momentum.
Exactly. They should focus on their core strengths. There are always going to “me too’s” and competitors nipping at their heels. Yes, you can’t continue that revenue growth but if you focus on things like quality and innovation, they should still be able to remain on the top level of all the brands.
Imitation is the highest form of flattery, said no fashion brand ever. Lululemon established itself where other brands like Athleta were unable to do by establishing a luxury lifestyle. These new brands are following and can be a major threat if they do not stay ahead and get creative. They have to fend off direct rivals as well as continue to contend with dupe culture. The partnership with Peloton in 2023 gave it a boost but they need more creative strategies in order to remain ahead.
There is very little to be surprised about here. LULU’s dramatic growth was a megaphone signal to the market that there was a ton of demand out there begging to be filled. And not everybody would want to embrace LULU, no matter how perfectly they executed. Ditto Nike. It’s the nature of a bell shaped consumer market. So yeah, LULU and Nike might lose a little market share. Market leaders have that kind of exposure. Ask department stores what happens when innovation stops while competition emerges from every angle possible.
I would be over the moon if I “only” made +10% sales growth last year & was on track for similar this year. Chasing 30%+ in a large and growing market with low barriers to entry is a fool’s errand and will destroy your company, and analysts pushing that narrative should not be trusted.
Completely agree. The market has unrealistic expectations if it thinks Lulu can keep growing as it has done over the past five years!
As workers return to the office more often, the cost of living remains high and new entrants pop up with dupes or substitutes, Lululemon may see slower growth. That said, their stores are always bustling.
Being the mature leader means you are always looking over your shoulder. Lululemon is now facing a breadth of competition cherry picking on the segment. What it needs now is a focus on the category and continue product innovation, not diversification into highly competitive areas like shoes to drive continued differentiation.
These new competitors are absolutely a threat to Lululemon. However, beyond the product they have also created a community of raving fans. Staying connected to their community’s needs, wants and challenges will be key for the brand to maintain relevance and engagement. Continuing to test and innovate across new product categories will also be important with an understanding that not all bets will work. The brand is definitely reaching maturity and other brands are certainly looking for ways to steal market share so continuing to expect +30% growth is not realistic.
11-12% annual sales growth is respectable given the size of Lululemon today. The outsized growth was never going to be sustainable. Yes, while there are more premium competitors today and there have been strategic mistakes (I have a dusty Mirror here in my office), the market is still growing (so bigger pie) and they are still the market favorite. I can see them continuing to do so as long as they maintain the performance and quality standards that made them ubiquitious with the fitness instructors, influencers and discerning athleisure shoppers everywhere. It’s not only the Vuori and Alo Yogas of the world that are gaining market share, premium brands such as Arctery’x have an increasing number of athleisure lifestyle products that are known for aspirational technical performance for those that can afford it.
Lululemon needs to refocus on its core strengths and stop trying to be everything to everyone. They should double down on their original high-quality, performance-oriented apparel and avoid distractions like Mirror and footwear.
Alo Yoga and Vuori are succeeding because they are agile, trendy, and highly focused. Unlike bigger brands like Nike, these smaller competitors can adapt quickly and target niche markets effectively. Lululemon’s slower growth this year is evident from their weak second-quarter guidance and the North American sales slump.
They must innovate within their core products and improve supply chain issues to stay competitive. If they don’t, they risk being overshadowed by these nimble upstarts.
Lululemon has built an outstanding business in the athleisure space, achieving an impressive average annual growth rate of 32% over the past 20 years. This success has naturally drawn competition from brands like Alo Yoga and Vuori.
To maintain its edge, Lululemon needs to continue focusing on product innovation, a key strength. However, the recent departure of the Chief Product Officer, who played a major role in driving innovation since 2018, presents a challenge. Not directly replacing this role may affect Lululemon’s ability to continue developing cutting-edge products, which is vital for staying ahead in a saturated competitive market.