Yahoo Finance How Lululemon parlayed yoga pants into an entry to the S&P 500
The yogi brand survived several scandals to become an athleisure powerhouse.
Lululemon is finally aligning with Wall Street.
The athleisure retail company officially joined the S&P 500 (^GSPC) index on Wednesday, replacing game maker Activision Blizzard (ATVI), which recently finalized its merger with Microsoft (MSFT).
The Canadian company weathered a series of storms in the mid-2010s but grew out of its yogi-heavy appeal into a cross-generational, multisport brand. In the past year, its stock has risen nearly 40%, while it recently beat estimates on earnings and revenue.
Last quarter, its net revenue increased 18% compared to a year ago, while internet sales growth jumped 15%.
"From a long-term perspective, this is a sustainable growth story," Bernstein senior analyst Aneesha Sherman told Yahoo Finance over the phone.
This run-up is a long time coming.
The company, which first started making its signature legging in the late 90s, went public back in 2007. By 2013, its share price had roughly quadrupled, as its revenue flew from $275 million to over $1.3 billion. Then, it hit choppy waters.
In March 2013, Lululemon recalled 17% of its black yoga pants for being too sheer, which cost it roughly $60 million in lost sales, reported the New York Times. Its CEO Christine Day resigned that June, and later told Fortune she left due to conflicting views with its founder Chip Wilson. Day declined to comment to Yahoo Finance.
That November, Wilson went on Bloomberg TV and said issues with his company's leggings was because "Some women’s bodies don’t work for the pants." He stepped down from the board a month later amid uproar from customers; Lululemon's share price dropped by roughly a quarter in 2014.
Day's successor, Laurent Potdevin, then resigned in 2018, which the company said was due to him falling short of expectations for employees when it comes to integrity and respect. Among the issues was a rumored relationship with a female designer at the company.
Amid the noise, Lululemon marched on, pushing more into menswear in 2014 and investing in digital sales. In August 2018, Calvin McDonald took the helm as CEO and carried forward the momentum as the company moved its appeal beyond yoga.
"Since about 2018, it's just been incredibly successful," David Swartz, Morningstar senior equity analyst, told Yahoo Finance over the phone. "It's defied all the pressure on retailers, especially apparel retailers in that time."
Leggings to work? It's the new normal.
As Lululemon began its turnaround, athleisure wear kept growing in popularity. In 2017, imports of stretchy pants outpaced those of jeans, according to the US Census Bureau.
The company capitalized on the trend at the right time, with a "premium price point with premium quality that worked with consumers," said Sherman.
Since then, other brands like On Running (ONON) and Hoka have been cashing in on the shift. On Running co-CEO Martin Hoffmann told Yahoo Finance at the Goldman Sachs Retail Conference that "the trend for casualization is not over," but still growing.
Multiple generations are buying in, a key growth driver for Lululemon.
The company has the ability to appeal to high schoolers alongside its core customer base of 35- to 55-year-olds, Sherman said. Its leggings are the No. 1 trend among upper-income teens, per Piper Sandler's latest semiannual Gen Z survey.
And the previous generation of teens that first grew up with athleisure are entering the workplace. It's now "perfectly normal" to wear leggings "to school, work, and church, and all sorts of [places]," Swartz said, far different than years ago when such attire would be similar to wearing pajamas to your job.
In the past few years, Lululemon has been able to ride "three waves of growth," which include e-commerce, athleisure wear booming during COVID lockdowns, and pent-up demand for high-quality casual apparel, Sherman said.
Lululemon's digital sales jumped 27% in fiscal year 2017, hitting a peak jumping 101% year over year in fiscal year 2020. More recently, non-athletic wear like belt bags and men's casual pants are gaining momentum, though it's too early to tell if Lululemon can become a universal brand like Nike or Adidas.
Last year, Lululemon released its plans to double its 2021 revenue of $6.25 billion to $12.5 billion by 2026. Besides expanding its product lines, the company aims to quadruple its international revenue and make China its No. 2 market. The move can unlock wholesale opportunities in the country as well, said Sherman.
It also launched its "Play" categories in 2022, which includes apparel for golf, tennis, and hiking.
Growth comes with risks, though. Sherman calls the brand's expansion into footwear last year a mistake, as it requires extensive development costs while diluting profit margins. In her eyes, the brand could have pursued other untapped areas like kids. Its $500 million acquisition of fitness startup Mirror in June 2020 also did not pan out.
Though the macroeconomic environment is volatile, Lululemon has been able to sell its inventory without taking a discount strategy, McDonald said at Goldman Sachs' Retail Conference earlier this year.
It's undeniable, though: People are increasingly looking for deals as inflation remains sticky and savings dwindle.
"I don't think they [can] escape [consumers looking for discounts]," said Sherman, "but I think it's probably a little bit more defensive because of the higher-income consumer segment."
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
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