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Lisa Carter/MEDILL

Lululemon Athletica Inc. plans to expand its global markets in 2013 and beyond.

Lululemon expands and finds balance with menswear

by Lisa Carter
Mar 20, 2013

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Lisa Carter/MEDILL

Lululemon Athletica Inc. markets its products with small logos and little advertising.

Practicing yoga used to be trendy and mostly confined to hipsters on the East and West Coasts. Now, the ancient Hindu practice has become a cultural phenomenon around the world and retailers are honing in on the opportunity. Let us chant three oms.

In the shopping world, Vancouver-based Lululemon Athletica Inc. is leading the pack in outfitting yoga pracitioners. Its customers can be found everywhere from yoga studios and gyms to grocery stores and coffee shops across the country sporting $98 yoga pants and racer-back tanks with the company’s logo. Salespeople — or “educators,” as they are referred to by company executives — in Lululemon’s 211 retail locations are encouraged to discuss exercise goals with customers and take into account their feedback written on chalkboards in the fitting rooms.

“Making sure we’re really building those relationships (with customers) — that’s what really sets us apart from being just another retail store that’s opening up to sell clothes,” said Nina Gardner, Lululemon’s community relations manager. “Absolutely we sell clothes, but we are building relationships. We are supporting communities.”

When researching where to open new stores, Lululemon considers real estate as well as the state of a yoga community in that area. In the third quarter ended Oct. 28, Lululemon opened North American locations in New York City; Omaha; Pittsburgh; Franklin, Tenn.; Memphis; and Bridgewater, N.J. with international expansion in Australia, Hong Kong, Singapore and the United Kingdom.

“Based on the success of both Hong Kong showrooms, we are actively looking to secure real estate for a store in that market,” said CEO Christine Day during a third-quarter conference call to analysts.

“Overall, we intend to go deeper in showrooms in Europe and Asia over the next 24 months, and we will begin preceding activities in up to 15 countries over the next two years.”

Most analysts believe Lululemon will be a hit in the international market. In her report, analyst Faye Landes of Cowen Group said Lululemon’s approach to opening stores that reflect the tastes of local communities is an important reason for the company’s success to date. “Thus far, (Lululemon) has been able to execute localized stores, and we don’t see any reason that they will be unable to continue to do so,” Landes said. “International markets will pose their own challenges, but the company is…just beginning to dip its toe in the U.K. and Hong Kong with showrooms that will help them assess local customers’ needs.”

Lululemon’s strategy appears to be paying off. Through the first nine months of fiscal 2012, the company’s profit rose 31 percent to $161.2 million, or $1.11 per diluted share, from $110.5 million, or 76 cents per share, in the same period of 2011. Lululemon’s revenue soared 41 percent to $884.9 million from $629.3 million. It’s an increase Landes believes shows Lululemon is gaining ground on competitors such as Nike Inc. and Gap Inc.

“The concept of a women’s athletic apparel retailer has been floating around for a long time, yet thus far (Lululemon) is the only concept to gain traction,” Landes said. “Nike’s heart was never in its defunct women’s concept Nike Goddess…And while Gap intends to continue to roll out its Athleta stores, the sharp deceleration in store opening plans corroborates our impression that the concept is far from hammered out.”

Part of Lululemon’s success in product sales, Gardner said, comes from its grassroots marketing efforts, which involve few advertisements.

“We don’t do ads. All of our marketing is done word-of-mouth and grassroots,” Gardner said. “The only place you’ll see ads is in ‘Yoga Journal’ and ‘Runner’s World,’ two national publications.”

These magazine advertisements don’t showcase the company’s logo prominently. Lululemon’s logo size compared with Nike, Under Armour and Adidas is “consistent with the ‘in the know’ nature of yoga,” Landes said. She notes that yoga enthusiasts take pride in often recognizing the brand while other consumers do not.

Maureen Atkinson, senior partner with Chicago real estate consulting firm J.C. Williams Group, said Lululemon’s low-key approach is a key to the brand’s success.

“They have this feeling that maybe if you make it too blatant, that customer finds that unappealing,” Atkinson said. “Clearly, they know their customer, know what’s important and what drives them. Being a little bit under the radar, not being out there and screaming their message all the time is working for them.”

Shareholders who have been along for Lululemon’s ride can reflect on their wisdom. Those who bought the company’s stock in 2009 paid only about $15 a share. It is currently trading around $64, which translates into more than 400 percent gain. The shares hit an all-time high of about $78 in September.

The shares currently trade at a price-earnings ratio of about 39, more than double the S&P 500’s P/E ratio of about 18. That means investors are willing to pay a high premium to get a piece of Lululemon.

But Lululemon has not always been in the spotlight for its success.

Just this week, the company recalled a line of its black Luon bottoms for being too sheer. As a result, its stock plummeted 4 percent Tuesday to $65.29 per share, and the company lowered its expectations of an 11-percent increase in same-store sales to a 5 to 8-percent increase.

Another recent road bumps involved a lawsuit with Calvin Klein. In Delaware federal court, Lululemon claimed Calvin Klein infringed upon design patents for the yoga company’s Astro Pant. The two companies reached a settlement with confidential details in November.

The corporation took another hit in 2011 when Brittany Norwood, an employee at a Lululemon retail store in Bethesda, Md., was convicted of first-degree murder of her coworker, Jayna Murray.

According to reports, Norwood attempted to steal yoga pants, and a confrontation broke out between the two women. Norwood bludgeoned, stabbed and choked Murray outside of the store.

Despite its various struggles, some retail consultants are confident Lululemon will bounce back. “I think their future is solid,” said Howard Davidowitz, chairman of Davidowitz & Associates Inc. “They’ve had a few missteps. There is a glitch in the earnings, but they’re the highest-producing athletic wear chain in the United States.”

The company isn’t resting in child’s pose.

In addition to expanding internationally, Lululemon is developing a line of menswear designed to appeal to runners as well as male yogis.

“They have moved from being strictly yoga to a lot of running stuff, which sort of broadens the appeal,” consultant Atkinson said. “From the point of view of men, it becomes more acceptable to be in a store that focuses on a store that focuses on running instead of (just) yoga.”

Davidowitz agreed the addition of menswear is a smart move for a company that is predominately focused on women’s apparel.

“Yoga is recognized not only by women,” Davidowitz said. “If you call health clubs, more men are attending yoga classes. Men are going to show up with their wives and their girlfriends to shop now. [I’d] say 90 percent of their business is women’s wear. If they can add 10 percent for men…I look at it as a very strong market for them.”

CEO Day said Lululemon’s men’s shorts, jackets and other athletic apparel have shifted to “a slimmer, more modern fit” to satisfy its customer base and attract a younger audience. Lululemon is set to open 10 corporate-owned stores in the fourth quarter, including one in northwest suburban Deer Park in April.

Day anticipates Lululemon will continue to expand its product lines.

“Our goal is to always innovate and have the discipline to do what we’re always driving to do strategically versus easy sales,” Day said. “As a market leader, that’s what keeps you disruptive and innovative, so we’re always leaving room in our margins to perform.”

Retail consultants like Davidowitz agree.

“Is this a powerhouse company? My answer is yes,” Davidowitz said. “Will it be five years from now? Yes, because they’re so dominant and so recognizable. They’ve established themselves as the headquarters for yoga wear in the United States.”