Lululemon's status as yogawear's top dog at risk

Phil Wahba
To accompany feature Leisure Yoga
A Buddha shrine sits at the entrance of Lululemon Athletic, a yoga clothing store, as a woman shops with her dog in San Francisco, California, in this March 31, 2006 file photo. REUTERS/Kimberly White/Files - RTR1CEFQ

By Phil Wahba

NEW YORK (Reuters) - Still hurting from its see-through yoga pants debacle last year, Lululemon Athletica Inc is about to face a new headache: stepped up competition from rival yoga retailers, department stores and hot new brands.

The company is facing aggressive competition from stores such as Gap Inc's Athleta, VF Corp's lucy and Macy's Inc and others selling activewear at lower prices at far more locations this year.

Small but hot yogawear brands such as Sweaty Betty and Lorna Jane also pose a potential threat, but the biggest competition is expected to come from Athleta, which will open 35 stores in 2015, tripling its numbers to 100 stores in just two years.

"Lulu has had clear sailing up until now. They were the gorilla in this category," said Kelsey Scroggins, a senior vice president at Marvin Traub Associates, a consulting firm.

Long a Wall Street darling for its dizzying revenue growth, the Canadian company recently reported its first quarterly comparable sales decline since 2009.

Lululemon shares are 38 percent below their 52-week high on investor concerns about growing competition, and the company is expected to update Wall Street at its analyst day on Thursday.

Lululemon's U.S. sales hit the $1 billion (597 million pounds) mark for the first time last year, more than triple what they were two years earlier, making it the top specialty retailer in the $14.5 billion women's activewear market in the United States.

But Lululemon's 2 percent same-store sales growth last year, lagged the womenswear market's 9 percent rise, according to NPD Group.

While Lululemon's international expansion is under way and the chain's first men's stores will open by 2016, investor worries about its U.S. business, representing two-thirds of sales, persist.

Lululemon declined to comment for this story, but Chief Executive Laurent Potdevin admitted to investors last month that Lululemon is "not the only game in town anymore."

The company's image is still recovering from the recall and a controversy in November when founder Dennis "Chip" Wilson said some women's shapes "actually don't work" with its yoga pants.

YouGov BrandIndex, which scores consumer perception of brands on a scale of minus 100 to plus 100, said Lululemon's score was -8, well below the +15 before the controversy.

Nevertheless, the company still has devoted fans, and has said there is room for 100 more U.S. stores on top of the 170 locations it currently has in its biggest market.

"If I have to buy new pants, I'm going to buy Lululemon," said Jennifer Stephens Acree, 44, an avid yogi from Los Angeles who praises the pants' quality and fit over those of rivals.

Graphic: http://link.reuters.com/bar58v

UPWARD FACING RIVALS

Gap CEO Glenn Murphy expects Athleta, an online retailer Gap bought in 2008 for $150 million, to eventually emerge as the retailer's fourth major chain, after Gap, Banana Republic and Old Navy. The company does not break out sales for Athleta.

With Gap Inc comparable sales weak this year so far, after a modest 2 percent rise last year, Murphy is under pressure to make Athleta a hit. Gap holds its own investor day on Wednesday.

Athleta's strategy has been to offer yoga wear at roughly 20 percent less than Lululemon, in part by tapping Gap's clout with vendors and stable of designers, and offering a wider array of casual clothing such as hoodies.

"A lot of spending on women's apparel has shifted to activewear," said Nancy Green, general manager of Athleta.

For example, the standard pair of black yoga pants that costs $98 at Lulu goes for $59 at Athleta, though they are not made of the same materials. Athleta sells hoodies for $98, about $10 less than what they go for at Lululemon.

Macy's Idealogy activewear brand will be sold at 400 stores this year, up from 160 in 2013, and Bloomingale's recently started selling the hip Barry's Bootcamp activewear brand.

VF hopes to get in on the action too with its lucy yogawear. After buying the 60-store chain in 2010, the owner of the North Face is ready to expand the brand, often seen as catering to a less fashion-forward customer than Lululemon.

"It's an area that's wide open," VF's Chief Financial Officer Bob Shearer said in a recent interview. "We are at a place where we can open new stores and build that business."

(Reporting by Phil Wahba in New York; Additional reporting by Solarina Ho in Toronto; Editing by Jilian Mincer and Eric Walsh)