Why Lululemon isn’t Under Armour

Where the similarities start and end

The following passage is adapted from my sister newsletter called Notes to Self; where I write concise notes…to myself… about companies I own or track.

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On March 21st, Lululemon reported FY23 results. All things considered, the results were good. Guidance, however, caused some upset. Lululemon shares are down ~29% this year; after being down just 6% before the report, and is currently the 8th worst-performing stock in the S&P 500. Lululemon’s implied 11.5% revenue growth for 2024 is a notable deceleration from years prior; having averaged an annual revenue growth rate of 24.4% over the last 5 years. This year’s revenue guidance is closer to, but still behind, the 5 years before that; where Lululemon averaged 15.7% annual revenue growth.

A report from Jefferies¹ concluded that Lululemon “could be the next under armour”. The report cites competition from rival premium athleisure brands such as Alo and Vuori, fashion shifting to “wide-leg” pants which are not Lululemon’s fotre, the wasteful capital allocation of Mirror hardware and entering the footwear market as “mistakes in strategic direction”. Slowing sales and unprecedented metrics and margins suggest Lululemon is on a proverbial knife’s edge. There are certainly parallels between Under Armour and Lululemon, but I will comment on why I think the comparison is unjust.

Why Lululemon isn’t Under Armour

Over the last few years, Lululemon’s valuation and overall investor optimism have been fully baked. Booming sales, widening margins, and a consumer that showed little sign of relenting despite a broader narrative of softening consumer spend. CEO, Calvin McDonald, singled out the US market as being “soft coming into the year” during the earnings call, citing a decline in traffic and conversion. This is reflected in first-quarter guidance that implies revenue growth of between 9% to 10% ($2.175 billion to $2.2 billion). We’ve seen similar rumblings across other industries; whether it be luxury leather goods and fashion, alcohol, retail, or premium coffee. There has been a marked shift in US consumer behaviour and the first couple of quarters look challenging. In a tweet captioned “Understanding the post-pandemic economy in one chart”, Ben Carlson² highlights the absurd, almost revengeful, comeback of US retail trade since 2020. I’m no economist, but you tell me if that looked sustainable.

US Retail Sales

When held in such high regard, companies Lululemon will find themself in a precarious situation whenever a deceleration begins to show. However, a slowdown is not necessarily a crack; and certainly not one that equates to the magnitude of problems Under Armour faced. History often rhymes, but investors are guilty of seeing patterns where they don’t exist, too.

For those who are unaware, Under Armour is a technical apparel brand, founded in the mid-1990s, and rose to prominence in the mid-2010s. At one point they were the second-largest sports apparel company in the United States by revenue, second only to Nike. They sponsored many of the world’s most high-profile athletes across a variety of sports disciplines. Between the company’s IPO in 2005 and 2017, they went on an exceptional 50-quarter run of consecutive YoY revenue growth.

Under Armour Quarterly Revenue Growth (YoY %), via Koyfin

However, by 2017 revenues began to slow and then decline. In the last 5 years, revenues have grown³ by just 10% and margins have languished. Part of the difficulty with Lululemon is that it can be hard to distinguish whether this is a brand which evolves like Nike, or one that experiences mass adoption and reaches a ceiling like Under Armour. There are similarities. They are both technical apparel businesses. They both were founded upon a principle of premium pricing. They both saw rapid adoption. They both fumbled in hardware and software. They both sold shoes. They both had competition (who doesn’t?).

However, that’s where the similarities end, I believe. Under Armour was blighted by a series of events that are not a factor in Lululemon’s business today. Under Armour began life with a focus on preserving the premium status of its brand. However, greed got the better of them. To ship more products they intentionally diluted their brand, lowered prices, and began partnering with discount retailers. This is a path the company have not reverted from to this day. While the volume of customers increased initially, Under Armour cheapened its brand.

The Jeffries report cites a misplaced strategic focus on footwear and fitness apps which “diverted attention from its foundational apparel business”. In 2015, Under Armour made a big bet on connected fitness with hardware and the acquisition of a number of digital apps. By 2020, and several impairments later, the company announced it was pulling resources from the digital fitness space. In shoes, many believed Under Armour entered a vertical where they had limited experience too aggressively. To appeal to sports stars, like Steph Curry, Under Armour promised to repeat what Nike had done for Michael Jordan. However, under the pressure of board executives, management fumbled the strategy. By the time the second generation Steph Curry sneaker came around, Under Armour flooded the market with supply, meaning most of the inventory was left to rot on sales racks. The mismanagement of Curry’s shoe partnership mirrors the disjointed decision-making in other shoe-related efforts.

In shoes and fitness hardware/software, there are some echoings. Lululemon recently entered the shoe market (an area they have little experience in), and also had a messy attempt at entering the connected fitness space. They did, however, cut their losses a lot sooner than Under Armour did. Acquired for $500 million in 2020, the Mirror Hardware Lululemon acquired was abandoned by 2023. Subscribers of the digital subscription were migrated to Lululemon Studio. Later, the company partnered with Peloton, a connected fitness hardware and digital subscription business, to become the exclusive digital fitness content provider for Lululemon Studio in return for becoming Peloton's primary apparel provider. A quick diversion and move to outsource non-core operations, but one that still leaves a mark on the management aptitude for acquisitive activities. As for shoes, the jury is still out. Lululemon only entered the space a few years back, and more recently with men. It’s clear the company have taken a conservative foothold in the market, offering just a handful of shoe ranges for men and women. No flooding the markets with supply, no megastar sneaker deals. At the same time, nothing groundbreaking either. I believe that the constraints and speed to correct course shown by Lululemon in these two verticals show a marked distinction from Under Armour.

Something which failed to make its mark in the Jeffries report is perhaps the most damning of factors in Under Armour’s downfall. From misallocated resources to devaluing the brand, a sequence of poor managerial decisions would ultimately be the nail in the coffin. By the mid to late 2010s, company culture had begun to take a few knocks to the head. Accounting shenanigans from 2015 would rear their head in 2021 and result in an SEC fine. A rotating door at the CFO's office and two rounds of layoffs between 2018 and 2019 showed further signs of instability as Under Armour engaged in restructuring. While Kevin Plank, Under Armour’s founder and two-time CEO, was correct in his vision, he failed to maintain a healthy corporate culture and adapt as the world changed.

Under Armour was often valued for its functionality, not style. By the time the athleisure trend came, where consumers wanted to appear athletic and fashionable, Under Armour began to lose out to brands like Lululemon; who capitalised on this trend initially by creating aesthetically pleasing yet technically capable garments. Later, Lululemon applied its knowledge of technical apparel to create more fashion-forward ranges that extended beyond fitness. Products such as the wunder-bra, everywhere bag, and men’s anti-ball-crushing (ABC) pants became immensely popular despite the fact they were not being used in sports. Today, Lululemon stocks an extensive range of “regular” clothing such as trousers, t-shirts, dress shirts, and sweaters, that are constructed from the fabrics that Lululemon customers love.

The Jeffries report cites competition from brands such as Alo and Vuori, both of which present nothing unique in comparison. Alo, in particular, lists goods at a considerable premium to Lululemon. Through their heavy spending on influencer marketing, they will no doubt appeal to the aspirational consumer. Alo certainly captures the fashion-forward trend of athletic apparel. Many of their garments can be worn for work, rest, or play. However, the competitive pressures are overblown. The comment on fashion shifting to wide-leg is not worthy of comment. Where I do agree with the report is the danger in looking through the next 12 to 24 months at Lululemon from the perspective of their historically high margins. The negative inflection is a genuine concern for shorter-sighted investors. At least for now, the business is catching up with itself, meaning the excessive growth rates seen in years prior are no more.

Jeffries analysts suggest this combination of increasing competition from Alo, the dangers of wide-leg pants adoption, and Lulu’s hardware fumbles and entrance into the shoe industry have resulted from sales averaging 30% growth in the last 12 quarters to 10% today. I believe there are wider economic variables at play here, particularly as it relates to the period of observation; the middle and conclusion of a worldwide pandemic.

Thanks for reading,

Conor

1. The Jeffries report, dated April 4th, 2024.

2. Ben Carlson writes A Wealth of Common Sense and is one of the hosts of the Animal Spirits podcast alongside Michael Batnick.

3. Under Armour trailing revenues, gross margin, EBIT margin, and net margin.