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Lululemon, Athleta, and On Running: Racing Up the Mountain

Thomas Paulson
Sep 9, 2022
Lululemon, Athleta, and On Running: Racing Up the Mountain

Performance apparel and footwear is an increasingly competitive category that has demonstrated robust growth, consistently strong unit economics, a DTC consumer relationship, and strong profitability. Nearly all brands now have trail runners and all are pushing into one another’s key demo: Nike has moved into women’s apparel, Lululemon has moved into running shoes, etc. Said differently, no one is staying in their own lane in this race, and elbows are being thrown and toes and shins cleated.  

Other star athletes in this race include New Balance, Brooks, Puma, Adidas, Fabletics, and many, many more. At the recent Goldman Sachs conference, On Running said that they have seen no slowdown in demand for its products and that it is likely to produce over 40% growth in 2H22, which implies around $600M (at retail) in growth in the U.S., roughly the same size as Lululemon's entire U.S. women’s business. In terms of a lower-priced brand, Skechers also stated that they have seen no signs of a meaningful pullback in the US.

Lululemon reported strong results last week, but their global breadth and limited geographic disclosures make it difficult to understand how their new stores are doing in the U.S. and how they are managing the U.S. store portfolio. However, data can help us interrogate its portfolio as well as Athleta’s.

As shown in the histogram below, Lululemon’s distribution of visits per location is not "normal," and it has a significant righthand tail to it. Moreover, that righthand tail is not locations in powerhouse big cities. Instead, it's in suburban locations such as Birmingham (4.3X the median number of visits in 1H22), Overland Park (south of Kansas City with 3.7X), Rosemont (north of Chicago with 3.2X), and Tulsa (3.2X). In contrast, New Haven, Palo Alto (Stanford), Portland, San Diego, Los Angeles (near USC), and 18 other locations posted visitations under 0.5X the median. The top-20 locations, out of the 134 in's platform, represent 30% of the chain’s visits. One caveat here is that data is limited to "street" locations, and this data shows Lulu has around 331 locations in the U.S., or 40% coverage. What this tells us is that there is a lot of opportunity for Lulu and other brands to newly consider markets that they would have otherwise not, pre-pandemic.

With which co-tenants? Interestingly, TJ Maxx, as shown below.

  • For 2Q22, Lululemon produced comparable-store sales growth of +23% with both the stores (+18%) and the digital (+32%) up robustly. The U.S. region was also up a robust +28%. Women’s product continues to be a beast with YoY growth of $240M, or 24%. Assuming that the total geographic weightings apply here, that’s $163M in growth, or +$700M annualized in the women’s category in the U.S. For the year and in all categories, U.S. revenue should be up over $1.1B.
  • CEO Calvin McDonald shared, "We are not seeing any meaningful variation in [consumer] cohort behavior or [any of] the metrics we track...New guest acquisition remains strong with transactions by first-time guests increasing over 20% [and] transactions by existing guests increased in the high-teens. Traffic across channels remains robust with store traffic up over 30%...Importantly, we are not creating this traffic through markdowns or price promotions. Lululemon remains predominantly a full-price business, and we have not changed our promotional cadence or markdown strategy and we have no plans to do so."
  • Trailing-twelve-month (TTM) sales per square foot increased $44 QoQ to $3,127, or up +33% from 2019.
  • Profitability increased due to the higher sales levels. However, transport costs and supply chain remain drags, although McDonald said that things were appreciably improving. That said, inventory levels remain about 30% higher (days of inventory) than in 2019.
  • TTM EBITDA of $1.8B is up nearly double from 2Q19; however higher inventory and capex has absorbed a lot of cash and TTM free cash flow is down to $237M (versus $305M in 2019). Over the next year, EBITDA is highly likely to increase by over $300M and FCF should substantially improve towards a 30% conversion rate (of EBITDA).
  • Year-to-date the company has opened about 9 net new locations in the U.S., some outlet, some in dense urban and smaller influencer markets (in addition to some pop-ups like on Abbot Kinney Blvd in Venice, California). Our data suggest that Fabletics and Lululemon have a similar traffic draw, and nearly 30% more than Athleta. From our review of the new Lulu locations, it appears that most are tactical decisions and not necessarily about producing outsized unit economics. Over the next year, we would expect Lulu to add just over 10 net new locations to just over 340 stores (non pop-up).

  • In contrast to Lululemon's gains, Athleta's comparable-store sales declined -8%, but remain +17% above 2019’s level (which is similar to what Lulu produced).
  • TTM sales per square foot increased $98 QoQ to $1,463, which is well above the $1,054 posted in 2019, but only 46% of Lululemon’s $3,127. As shown in the figure above, visits are roughly 75% of Lululemon’s levels, with the difference being a larger average transaction size and a more developed e-commerce business for Lululemon. Excluding digital sales reduces the figure to $1,282, which suggests that Altheta’s sales densities are very competitive with Lululemon.
  • Athleta added 5 net new units to end at 231 locations. Over the next year, Athleta is likely to open 30 new locations and close 4 to reach 258 locations by July 2023.

  • Old Navy comparable-store sales declined -15% to bring it even with 2019’s level.
  • TTM sales per square foot declined $16 QoQ to $415.
  • As of 2Q22, there were 1,263 Old Navy locations. Whether it continues to be a growth brand in locations will be decided by the new CEO, who has yet to be named.
  • Gap Inc.’s profitability declined substantially due to inventory impairments, increased promotions, higher freight costs, and higher product costs. EBITDA was above breakeven.
  • TTM EBITDA and free cash flow of $374M and -$1,021M are significantly down from 2Q19 levels of $1,911M and $303M.
  • Working capital was a substantial drag on FCF both due to higher inventory, but also lower accounts payables as well as a high level of capex.

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more.

He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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