Athleisure Has Become Everyday Clothing

Key Points:

• Athleisure was a thriving category before Covid-19; it’s even more prevalent now.
• Lululemon dominates the category and has top brand relevancy with global scale.
• Lulu’s purchase of in-home fitness maker, The Mirror, offers significant revenue opportunities.

Athleisure

Lululemon has become the most relevant and recognizable athleisure brand in America and increasingly around the world. The company’s stores offer exceptional aesthetics, strong customer service, and the brand now serves men in a major way. This brand started as a niche player in the yoga category but is now so much more. I’m sure Nike ignored their dominance in such a seemingly small category early-on, but I can guarantee Nike is not ignoring Lulu now. That’s the thing with high brand relevancy. Once a company achieves it and does not get complacent while pushing the innovation button on a consistent basis, it’s hard to be unseated. The brand dominance in our minds becomes a self-reinforcing mechanism as we get more entrenched with brand loyalty.

We have all seen the stats, women control 85% of the household wallet and one of the most important guilty pleasures for women of all ages is to take a trip (virtual or physical) to the Lulu store to find a cool new pair of yoga pants, workout tops or that light jacket they have been eyeing. Increasingly, men have become quite active at Lulu as their sales to men grow into the billions of dollars with significant room for global expansion.

With the work from home focus now becoming a trend with long legs, the athleisure category and Lulu’s dominance of it looks poised to re-accelerate after a few months of global store closings from the Covid-19 pandemic. People around the world are working more from home, dressing down, and prefer comfortable clothing. Athleisure seems to be the new business casual and I don’t see this changing on the margin anytime soon. A massive number of companies have announced they are focused on employees working from home for at least the rest of the year and many companies have stated the intention of shifting all or part of their workforce into a work from home or part-time work from home focus. This should be good for productivity and employee happiness and a major new growth opportunity for brands like Nike, Lulu, Athleta to name a few.

Lululemon is the most relevant brand singularly serving the athleisure theme.

In my last blog post, I wrote about brand consulting firm, BrandZ’s 2020 Top Global Brands report. Every year BrandZ highlights the 20 brands that have increased their brand value the most year over year. Historically, the “Top Risers” in aggregate have delivered significant forward shareholder returns. Lulu ranked #3 with a 40% increase in brand value and has been a stellar outperformer for years. With the temporary closing of most of their stores last quarter and their re-opening, I expect Lulu earnings and sales to sling-shot back in a major way over the next few quarters. Based on our proprietary brand relevancy scoring system, Lulu continues to be one of the most important brands serving global consumers. The athleisure trend outside the U.S. is still fairly early in its adoption phase and with Lulu’s stores being highly compelling and with significant local consumer loyalty, the future continues to look very bright for Lulu shareholders.

Lulu has been very consistent and focused with its goals by 2023:

1. Double the men’s apparel sales.
2. Double the omni guest experiences – physical and digital stores.
3. Quadruple international sales.

The Mirror Acquisition

My family recently ordered the Mirror and I have to say, our experience after a month of using it is exceptional. Lulu paid a steep price of $500 million to purchase this two-year old company and I’m quite sure there was some competition for this purchase.

It wouldn’t surprise me if Nike was also bidding for the company but it was formed by a former Lulu ambassador so there was clear loyalty to the Lulu brand. Lulu was also an early investor in The Mirror and the two companies clearly had enough data from doing a few select test cases that it felt comfortable making the acquisition quickly.

In Lulu’s webcast discussing the acquisition they talked about the global addressable market opportunity plus the opportunity to expand and cross-sell to their current customer base. Consider these stats: the global physical activity market is projected to be $500 billion in total. The global wellness market opportunity across all segments of businesses is projected to be roughly $3 trillion. The Mirror was growing sales quickly before Covid-19 with a $100 million run rate and with a renewed change of lifestyle, adoption will just accelerate for the foreseeable future. The Mirror has smartly removed all the friction from trying the service with a 30-day free in-home trial and free returns. Everyone who has fitness goals should at least try The Mirror.

The Mirror is a simple yet effective physical device that connects consumers with a 1-1 personal trainer, on their time and how they want. There are 70+ live classes every week (yoga, strength, boxing, stretch, bar, foam rollers, etc.), including 40+ types of classes for any of someone’s physical needs and goals. Better yet, only roughly 10% of the U.S. population has even heard of The Mirror. Now Lulu can easily introduce The Mirror to their existing global client base and adoption should start the hockey-stick portion of the growth curve. What gets me excited is the secondary opportunities: how about having The Mirror in every hotel room, office space and the potential to connect every local personal trainer with their clients using The Mirror as the mechanism. There’s only so much time in the day so The Mirror allows a local trainer in San Diego to connect and market their services to global consumers.

I have no idea how Lulu is thinking of their total market opportunity but they could build one of the highest margin sales forces on the planet by allowing a trainer to capture a piece of the sale price for connecting their client base to The Mirror as well as taking monthly subscription for the classes they teach. With virtual health being a major growth theme going forward, I can also imagine a Physical Therapist building a virtual business and delivering laser-focused stretches and exercises across a variety of common ailments to an unlimited number of patients. The opportunities are literally enormous for this service long term. The near-term opportunity for Lulu and its shareholders is the low overlap between the clients of the two companies and the cross-selling opportunities that exist to connect people to the physical and digital sweat-life. I suspect the trainers will start to wear Lulu apparel and the ultimate plan will be to offer “in The Mirror” apparel purchases as you see the clothing on the trainers. Massive revenue and enhanced-branding opportunities if executed correctly.

SUMMARY:

Here are some key takeaway points for investors to consider:

• Casual apparel and specifically the athleisure market are exploding with no signs of stopping.
• Lululemon took Nike by surprise and they continue to dominate the category.
• Lulu has increased brand value significantly year-over-year and the stock has outperformed significantly.
• With the acquisition of The Mirror, Lulu gets a massive new potential revenue driver, adds new brand loyalty opportunities in their quest to dominate the sweat-life here and abroad.

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