Goldman Sachs

Move over LULU

RR LululemonUpstart Activewear Brands Are Nipping at Yoga Giant’s Heels

Colby Ziegler and her mom have a lot in common. They both have deep hazel eyes, a passion for Egyptian art, and a twice-a-week yoga habit. What they no longer share, however, is a devotion to Lululemon. “When I was in high school I loved the brand,” said the 26-year-old software developer. “But now I don’t want to wear what my mom wears. I need my own look.”

It seems Colby is not alone in feeling this way. Although many young consumers still flock to the $2 billion retailer’s 350+ stores in search of the perfect yoga pants, others have begun to gravitate toward the myriad alternatives that have sprouted up in the activewear segment, which today is one of the only, well, healthy areas in apparel retail.

Lulu Lost

After many years of rapid expansion, thanks to a cult following of fitness enthusiasts who have no problem plunking down $100 for a pair of basic leggings, the 18-year-old Vancouver-based Lululemon has seen sales growth slow dramatically in the past few years, a situation that began in 2010 when fabric quality problems resulted in what most in the industry believe was the first yoga pant recall in history. Though sales have recovered, the company’s reputation has not, or at least not fully. Critics claim that the product quality never returned to its prior level, anathema for a garment that needs to hold up to several launderings per week.

In early June, Lululemon founder Chip Wilson published an open letter to the company’s shareholders, claiming that the company has “lost its way,” and allowed Under Armour and Nike to gulp up share in the athleisure market Lululemon created. In the letter, he claims that since late 2013, Under Armour’s stock price has increased 79 percent and Nike is up 45 percent. Lululemon, however, has seen its shares drop eight percent, “in the midst of the greatest change in the way people have dressed in the history of the world.”Wilson is no stranger to controversy. Two years ago he made a comment that many interpreted as meaning that some of the brand’s fabric issues were due to the fact that the women wearing it were too heavy. He resigned from the company last year, but retains, he claims, about a 14 percent share in the publicly-held firm.

Next Gen Activewear

However, what Wilson might not be aware of is that it’s not just Nike and Under Armour stealing share from Lulu. A whole new crop of next-generation activewear brands is capturing the minds and hearts of today’s avid exercise and athleisure fans. Consumers who were once Lululemon’s early adopters are now moving on, looking for something different.

And millennials, notorious for their focus on individuality, convenience, and value, have discovered (and, in many cases, founded) new brands that make more sense to them from a style, quality, and brand positioning standpoint.

Who are these upstart share-stealers? Earlier this year, Goldman Sachs invited several of the most promising up-and-coming athletic brands to present their stories to investors at a half-day forum. Although each of these relatively new companies does activewear with a slightly different twist, Goldman feels they all have the potential to be formidable players in the space.

  • UK-based Sweaty Betty is a premium activewear brand founded in 1998 with a mission to inspire women to find empowerment through fitness. Not just for yoga enthusiasts, Sweaty Betty caters to runners, tennis players, skiers, swimmers, dancers, and other athletes. It uses technical fabrics in beautiful colors and designs to offer fashion-forward performance. Starting with one shop in London’s Notting Hill area, it launched a luxury fitness shop-in-shop in Selfridges in 2006, an e-commerce site in 2008, and now boasts more than 50 locations, eight of which are in the United States.
  • Bandier is a multi-brand retailer based in New York. It offers a carefully curated selection of exclusive brands, such as Alala, Sundry, and Phat Buddha, as well as mainstream brands like Under Armour. With a flagship store in New York’s Flatiron district and others opening across the country, and a rapidly growing e-commerce business, it has become a favorite of Gen Y and Z. Bandier has access to a wide range of great product from its small wholesale partners, and claims that 40 percent of its product offering is exclusive.
  • Yogasmoga was founded in 2010 by brother-sister team Rishi and Tapasya Bali, former Wall Streeters who grew up in a region of India at the base of the Himalayas, which is believed to be the birthplace of yoga. They were raised in the culture and lifestyle of yoga, and are able to use this firsthand experience to create a deeper connection between their brand and customers. Though premium priced, the brand positions itself as a more authentic yoga brand, and differentiates itself by using a number of proprietary fabrics made of fibers that it produces in eco-friendly mills in California. It also claims to not retouch any of the pictures on its website. Yogasmoga has three retail stores in the United States, and hopes to have 75–100 by 2018.
  • Spiritual Gangster is a yoga-inspired clothing company that views itself as a movement, not just a brand. Sold through its website, as well as in multi-brand retailers like Nordstrom and the millennial favorite e-commerce powerhouse Revolve.com, the brand is worn by celebrities and style influencers who then post on social media.
  • Rhone is a men’s premium activewear brand designed, quite frankly, for guys who want higher quality than Nike offers, but aren’t comfortable wearing a women’s yoga wear brand. GQ magazine called its silver-containing anti-odor products, “the best odor-fighting activewear on the market.” Other products are made of fabrics featuring moisture-management and additional benefits. The brand is available in retailers like Bloomingdale’s and Nordstrom, in the boutiques at the Equinox fitness clubs, and through its online store.
  • Fabletics is a membership subscription model offering fashion performance products at very sharp price points. Its wildly successful marketing partnership with actress (and Fabletics co-founder) Kate Hudson has helped it become one of the most rapidly growing active brands in the market. Like many successful e-commerce retailers, Fabletics is testing brick-and-mortar stores. It has about seven stores in the U.S., and plans to open up to 100 more in the next three to five years. Fabletics is owned by e-commerce powerhouse JustFab.com (which also owns Kim Kardashian’s ShoeDazzle, a unicorn private company with billion-dollar plus valuation).

Financial Insights

At the Goldman Sachs forum held this past spring, several key themes emerged that help illustrate why these brands are finding success in the increasingly crowded and competitive active sportswear space. These themes were summarized in the report “Emerging Athletic Brands” co-authored by equity research analysts Lindsay Drucker Mann, William Hutchings, Bill Schultz and Edward McLaughlin.

According to the report, shifting consumer attitudes and lifestyles have made active apparel an “aspirational” category which can now be worn outside the gym. Sweaty Betty claims that 80 percent of its customers’ wearing occasions are non-workout-related, and feels that Lululemon’s entry into the UK market will be good for its business since it will enhance awareness of the athleisure category.Despite the fact that much of the product is worn outside the gym, authenticity remains of primary importance to consumers. The apparel still needs to be great from a performance standpoint. These brands, though relatively small, have access to state-of-the-art performance fabrics and quality manufacturers. They also can be quite profitable, thanks to their premium pricing and direct-to-consumer distribution. Many of the brands at the forum are enjoying gross margins of up to 50 to 70 percent. Virtually all of these brands have physical as well as e-commerce stores, and all are moving into mobile as well. These brands view brick-and-mortar as an important format to complement their digital distribution, as well as an important avenue to drive trial, awareness, and favorability. It is also the best environment in which to offer a unique customer experience. For example, Bandier enhances brand equity and drives traffic to its Fifth Avenue store in Manhattan by offering workout classes from some of NYC’s top fitness professionals.

It looks like the activewear and athleisure segments might still have some room for expansion. The Goldman Sachs report concludes that, overall, presenters at its activewear forum felt “there was a lot of room for many to succeed in an overall growing market, rather than it being a zero sum game.”

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