I remember when yoga was just playing Twister…..
Yes, we mused, it’s ok to be comfortable on casual Friday but were those………sweatpants?! The astute Lou immediately sensed our reservations on his attire choice. “It’s not what you think,” he said. “These are yoga pants, and they’re comfortable. You’ll see – they will catch on.” Lou has always been ahead of the curve – Facebook, Tesla’s Model S, Jimmy Carter-era bonds, prosciutto di Parma – but this seemed a little farfetched. However, as he walked by, we had to admit that he looked impeccable. We thought to ourselves, “Maybe he’s on to something.”
Although that incident was over five years ago, the “athleisure” (casual clothing for both exercise and general use, like dining out) space has now been fully engrained into our culture. Those that called it a fad and baulked at $85 gym shorts are now outfitting their entire wardrobe with lululemon, Athleta, Nike and others. And those that were early have already moved on to dressing their kids in it. Part of the acceptance has been from more flexible dress codes and increased awareness on staying healthy. Additionally, millennials have been a huge driver, too, with their technology- and health-conscious attitude. And while we’re not necessarily exercising more often, there is undoubtedly an improved sense of wellness generally. These developments have helped broaden the category beyond just a niche subsegment of retail to the powerful category it is today.
The adoption of athleisure has been a nice tailwind for apparel sales over the last five years. For example, in 2016, the athleisure market rose over 15% to roughly $44 billion in the US. More importantly, however, going forward Morgan Stanley predicts the market will grow to $83 billion by 2020 and over $350 billion globally. Even if these estimates are high, the growth in athleisure is compelling in a space (i.e. retail) that typically only slightly outperforms GDP.
Like most fashion trends, athleisure will likely fade but we see an investment opportunity in it through lululemon, not just because of the category, but as a result of structural changes at the company that still haven’t fully flowed through the model. We have always regarded the company as a remarkable growth story, led by top-notch management, but what’s new and gaining steam is the use of data analytics and technology. Additionally, we believe the fundamentals are compelling, driven by a solid eCommerce segment that is in the early stages, significant growth prospects abroad (Asia, for instance, is expected to see roughly 30% growth in the athleisure category) and the men’s business adds potential upside (the company has discussed a +$1 billion potential). Lastly, lululemon commands a leading position in the category, has a distinguished product assortment, unique store experience and a strong square footage growth and margin expansion opportunity. For these reasons, we are excited about the prospects for LULU and give it a Warrior 1 pose salute.
Namaste – The Catamount Team