Why I Bet on Lululemon: How It's Shaping the Future of Fitness Fashion

Summary

Rising Health and Self-Consciousness: The global wellness market is significant, fostering growth in the Athleisure Market. COVID-19 accelerated this trend through digital fitness platforms, at-home equipment, and fitness apps. Women’s increasing participation in sports also supports market growth.
Success in China and Asia-Pacific Growth: Lululemon’s revenue saw substantial increases, particularly in international markets. China’s growing yoga participation and the “Healthy China 2030” initiative, coupled with the expanding middle class, provide a solid foundation for Lululemon’s expansion, with plans for numerous new stores in China.
Strong Brand Strength and Competitive Moat: Lululemon’s niche focus on yoga apparel and community-oriented marketing distinguishes it from competitors, contributing to customer loyalty. Its direct-to-consumer sales model enhances control over pricing and margins.

The global wellness market is estimated at more than $1.5 trillion, with an annual growth rate of 5 to 10%. Wellness dimensions such as better health, sleep, and mindfulness are gaining traction
Covid-19 also provided some major tailwinds for the Athhleisure Market as it made working out and fitness more accessible: (1) Use of digital platforms like Peloton, (2) Investment into at-home equipment and (3) the rise of fitness apps and online training

Global landscape of women’s participation in sports events such as the Olympic Games showcases the positive impact of gender equality in sports on a country’s performance. For instance, in the 2012 London Olympics, the USA included more women than men for the first time, resulting in women winning more medals than men and contributing significantly to the USA’s overall success. This pattern was observed again in the 2016 Rio Olympics.
Therefore, the growth in women’s participation is driven by heightened awareness and advocacy for gender equality in sports, increased availability and accessibility of women-specific fitness programs and communities, and the rising influence of female athletes and fitness influencers promoting health and fitness
Putting this together, this provides a huge tailwind for Lululemon as the company primarily targets women as its main audience, particularly focusing on the active and health-conscious female demographic interested in yoga, running, and other fitness activities

In Q3 2024, Net revenue increased 12% in North America and increased 49% internationally. This fits into the first thesis point, but another point to highlight is that from 2017 to 2021 the number of yoga studios in China tripled to 42,000, and it’s estimated that at least several million people in the country practice yoga regularly, while more people occasionally do so, with the most prominent segment being women
Lululemon is planning to open 50 net new stores this year, and 30 to 35 will be international, with the majority located in China. In addition Lululemon aims to open a total of 220 stores in China by 2026.

There’s also a macro backdrop in China: Healthy China 2030. It is a national initiative launched by the Chinese government with the aim of improving the health and well-being of its population consisting of: (1) Broad Health Goals, (2) Healthcare Improvements, and (3) Adoption of Healthy Lifestyles
The share of China’s population in the middle income group has also experienced significant growth, growing from 3.1% in 2000 to just over 50% in 2018
LULU, perceived as a premium product depends on this segment to grow it’s revenue. Diving deeper in the China’s middle class, China already makes up the largest middle-class consumption market segment in the world. Chinese middle-class consumption initially will follow the growth path of the Western middle class, with increasing consumer demand for higher quality products

Lululemon, has carved out a niche for itself by focusing primarily on yoga apparel and expanding into other categories like running and training gear. Its branding strategy is heavily centered around lifestyle, community, and wellness
Lululemon’s approach to marketing is more community-oriented, with a strong emphasis on building customer loyalty through in-store events, fitness classes, and a focus on a holistic lifestyle that resonates with a specific consumer base
Consumers choose Lululemon over competitors for several key reasons: specialization in yoga wear and equipment, creating versatile athleisure wear that transitions seamlessly from workouts to everyday activities, and consistently offering high-quality products made from exclusive materials

The moat is clear when looking at the gross margins when comparing Lululemon vs. Nike and Under Armour due to Lululemon’s ability to position it’s product as a higher quality/premium product that justifies the high price tag
In addition, Lululemon primarily sells its products through its own stores and website, bypassing traditional retailers. This direct-to-consumer approach allows the company to set its own pricing and improve profit margins by maintaining control over its sales channels

High Risk: Lululemon is valued as a growth company as it should growing high 10s to 20% revenue growth year-over-year. Market saturation in the North American market combined with any expansion issues into emerging markets will quickly change the narrative and cause ratio contractions.
Med Risk: As Lululemon is positioned as a premium product, prolonged period of high interest rates may reduce consumer spending on discretionary goods
Med Risk: Lululemon is market expansion is one of their core strategies going forward (Power of Three). Geopolitical risks such as the US – China trade wars that occurred during the Trump administration will significant impact Lululemon’s ability to grow the business in China. Though Lululemon is a Canadian company, the negative sentiment will carry over to the full North America, not just US. As the 2024 elections draw near and Trump being in the runnings, the focus on the diplomatic relations between US – China might be in question again.