1/13/2011
By Brian Sozzi, Research Analyst

Lululemon (LULU) mania has continued into 2011, aided by the hike in 4Q guidance Tuesday evening.  Bullish analyst report after bullish analyst report has extolled the virtues of Lululemon being the can't miss investment opportunity from the retail sector.  I have heard it's the next Polo Ralph Lauren (RL).  I have heard it's the next Coach (COH).  Lululemon is supposedly sitting on a gold mine of yoga hungry women willing to spend $108 for a stretchy bottom.  The company's financials are supportive of the notion that Lululemon is not a faddish company in the spirit of Crocs (CROX), simply peddling cheaply sourced goods from China at a huge markup to the consumer.  I can't quite place the last time there was such a harmonious marriage between consumer affinity for a brand and analyst enthusiasm for the stock.  Perhaps Decker's Outdoor (DECK) a few years ago?

Amidst all the Lululemon hoopla, Gap (GPS) quietly issued a press release today announcing the opening of its first Athleta store, a 5,000 square foot box in San Francisco.  Why should this matter if you are a shareholder in Lululemon?  Isn't growth set to go up in a straight line for the next five years unabated?  I tell you why you should be on notice.  Athleta represents the first credible threat to Lululemon's yoga apparel market dominance (wide moat business this is not).  Athleta's product offerings are not the mediocre quality women's athletic garb increasingly sprouting up at Target (TGT) and Kohl's (KSS).  It's quality product at an attainable price.  Moreover, unlike Lululemon, Athleta is coming to market with a complete lifestyle assortment.

What is equally important to take away here is that Athleta is a brand purchased by CEO Glenn Murphy quickly upon his arrival at the company.  That means Athleta's growth path and in turn performance, is owned by him.  All of this shows in the time and care taken to develop the brand online first since Athleta joined the Gap family of brands in 2008, at a cool $150 million (looks like a steal in hindsight).  Gap is hungry to recharge its overall revenue and earnings growth rates as trends in the established portfolio only being so-so, and certainly has the balance sheet to aggressively pursue Athleta store openings...globally.

Yoga is known for relaxing mind, body, and soul.  However, if I were a Lululemon shareholder, the footsteps of a hungry, more established competitor would indeed interrupt my positive Chi.

At a Glance: Athleta

* Gap bought Athleta for $148 million in 2008.  With Lululemon's market cap at $5.2 billion, doling out $148 million seems to have been a good investment.  Though Gap does not provide a financial breakdown of Athleta in its filings, there weren't any write -downs of Athleta's assets in 2009 or 2010 despite the downturn in the economy.  Positive sign in terms of forward growth.

* Will benefit from Gap's leverage with suppliers, especially during a time of raw materials price inflation.  This shows somewhat in product pricing between Athleta and Lululemon.  Athleta tank top price points range from $39 to $59, pants $69 to $98.  Lululemon tank top price points range from $48 to $78, pants $78 to $108.

* Complete lifestyle, not solely a yoga apparel company.  Yoga, run, hiking, gym, training, winter, ski, adventure, swim, golf, tennis, cycling, and triathlon are all categories offered.

* I did gain a vibe that Athleta has a sense of community, perhaps not as strong as Lululemon's (business model is different), but in reading the Athleta "Chi Blog" it was apparent.

* Has already forged relationships with top vendors, including Smartwool (socks sold by Timberland), New Balance (sneakers), K Swiss (sneakers), Merrell (sneakers by Wolverine Worldwide), Sorel (sneakers by Columbia Sportswear), and Oakley (sunglasses).

* San Francisco Athleta store size is 5,000 square feet as opposed to 2,900 square feet for a typical Lululemon store.

* Interesting products: Sentry canvas sneakers by Sorel; H20 two bottle belt by Fuel Belt; Oakley sunglasses.

Brian Sozzi
Wall Street Strategies

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