Anne Howard, a mother of two teenage daughters in San Francisco, said she was a loyal Lululemon customer and enjoyed shopping at a store near her home. But when she bought a gift for her husband this holiday, she chose Nike jerseys because the No. 1 pick for her husband was Nike, not Lululemon.
“If I give him a Lululemon, then he will probably ask me what it is,” she said. “Nike? No questions asked.”
Lululemon, which acquired the at-home workout equipment maker Mirror early in this year, has reported huge sales growth even in the pandemic as people worked out at home and adopted sportswear and loungewear as their daily wardrobes. Based on continued sales momentum, its stock outperformed that of sportswear giant Nike. But Lululemon may not be able to maintain its strong sales growth rates and take over Nike’s leading position in the industry amid intensifying competition.
For its third quarter, which ended Nov. 1, Lululemon reported a 94% growth in the direct-to-consumer (DTC) revenue, which was driven by consumers’ massive online shopping on its website.
Online sales have come to generate a larger part of Lululemon’s revenue over the last five years.
The soaring online sales offset declines in foot traffic in brick-and-mortar stores during the pandemic, so for its third quarter, the company reported $1.1 billion in sales, 22% up from the same period the previous year. The company’s earnings went up to 143.5 million, an increase of 14% year on year.
Because of the continuing pandemic uncertainty, Lululemon did not provide a full outlook for 2020 at its conference call, but analysts expect its revenues will hit $4.3 billion for the current fiscal year ending on Feb. 28, 2021. The revenue is projected to leap to $5.4 billion in fiscal 2022.
Lululemon’s CEO, Calvin McDonald, said in an interview with CNBC on Dec. 15 that he did not expect sales growth to slow even after the pandemic ends thanks to the robust growth in online sales.
“We don’t see any dramatic impact in the reduction of the momentum in the business,” he said. He added that the company plans “to double its men’s business, digital sales, and quadruple the international sales.”
But Lululemon may not achieve these goals due to increasing competition. Some Lululemon customers are already turning to its competitors as more leading sportswear companies, which already have a broader customer base than Lululemon, challenge the company by developing premium products that are modeled on Lululemon’s offerings.
The luxury activewear brand Koral collaborated with the Italian sportswear maker Kappa on a new collection, the Koral x Kappa, which launched in May. Guess, a casual clothing retailer, also launched an athleisure collection in May.
“Lululemon has been strong for the past three years, but it does not exist in a zero-competition world,” said David Swartz, an equity analyst at investment research firm Morningstar Research Services LLC.
Not only is competition escalating in the premium activewear market but expanding a market is also challenging for Lululemon to do, especially in menswear, where Nike built a stronghold.
In Lululemon’s profitable third quarter, menswear sales growth of 14% trailed the 22% growth for women’s.
Lululemon has branded a luxury image targeting the upper-middle-class millennials with a fitness mindset, including yoga-savvy women. The niche market has hindered the company from appealing to a wider customer base, including Howard’s husband.
“To Lululemon, men’s is in more direct competition with established companies like Nike,” Swartz said. He added that Lululemon was not the only sportswear company that showed “better-than-expected growths.”
Nike, which has a loyal customer base in menswear, reported a 9% increase in its revenue and a 12% surge in its net income from a year earlier in the quarter ended Nov. 30 with an 84% jump in digital sales.
As two athleisure companies’ revenue have climbed, their stock prices have also ascended. Lululemon gained 61% over a year, exceeding Nike’s 40%.
Since Lululemon has beaten analysts’ expectations every quarter in 2020, investors’ expectations are now exceptionally high. If small indicators show the company being insufficiently competitive, the stock market is likely to react negatively.
“Concerns would be that if Lululemon ever misses a quarter, stocks will be sold a lot,” Swartz said. “When the expectation is this high, any kind of slowdown in its business or miss of a quarter will be perceived negatively.”