There are a lot of similarities between the growth that Lululemon Athletica (NASDAQ: LULU) is experiencing now and the growth that Nike (NYSE: NKE) was experiencing about 30 years ago. It took both companies about four years to nearly double their revenue from over $2 billion to nearly $4 billion.
The main difference between the two is that Nike generates most of its revenue from footwear and Lululemon makes virtually all its money from apparel. But this crucial distinction also shows how Lululemon is standing out in the industry and dominating the apparel space in the same way Nike has dominated footwear.
Lululemon is quickly gaining market share against Nike and Adidas (OTC: ADDY.Y) (OTC: ADDDF) in apparel. Designing highly technical clothing with a touch of fashion is one thing the yoga specialist does better than its peers.
Growing faster than the competition
Nike and Adidas still generate more than twice the annual revenue from apparel that Lululemon does, but Lululemon is quickly gaining ground.
Nike grew its apparel revenue from $8.63 billion in fiscal 2015 (which ended in May) to $10.95 billion in fiscal 2020, representing cumulative growth of 27%.
Adidas grew its apparel sales from 6.279 billion euros ($7.62 billion) in 2014 to 8.96 billion euros ($10.06 billion) in 2019. That's a cumulative growth rate of 43% in local currency.
But Lululemon nearly doubled its revenue, which is virtually all apparel, from $2.06 billion in fiscal 2015 to $3.98 billion in fiscal 2019.
Nike's fiscal 2020 revenue includes some of the impact from store closures around the coronavirus pandemic. The company's apparel revenue was $11.55 billion in fiscal 2019, so that's nearly a $3 billion incremental increase from its fiscal 2015 level. But if Lululemon continues to grow its revenue at more than twice the rate of Nike and Adidas, Lululemon could significantly narrow the gap, if not catch the leaders, within 10 years.
Even with a strong economy, before COVID-19, Nike managed to grow its apparel sales by just 10% (excluding currency) in the fiscal second quarter ending in November 2019. Adidas grew its apparel sales by 7%, excluding currency, in the fourth quarter of 2019. Lululemon posted revenue growth of 20% during the final quarter of fiscal 2019, which ended Feb. 2.
What is Lululemon's secret?
Lululemon has touted its Science of Feel method of designing apparel. The brand started to enter the mainstream of athletic wear around 2010 with its Luon fabric. Lululemon stood out for the use of organic cotton and seaweed in its clothing. It even developed its Silverescent fabric made with real silver that helps reduce the growth of bacteria and stink in clothes after a sweaty workout.
All athletic apparel companies talk about innovation, but Lululemon is clearly doing something different than Nike and Adidas. Other than its Science of Feel method, Lululemon emphasizes its connection with its customers, which has been instrumental in learning what they need. Lululemon has implemented a strategy centered around community, which explains why the company regularly hosts outdoor events, offers sweat classes in its stores, and just spent $500 million to acquire MIRROR, an interactive display that offers workout classes from the comforts of home.
Fashion has also played a key role in Lululemon's growth. In the era of athleisure, this emphasis on its design process cannot be understated. In its annual report, Lululemon says that collecting feedback and incorporating customer insights, including about customers' fashion needs, helps the brand solve problems for its guests and stand out from the competition.
Even nonworkout gear has been a huge success for Lululemon in recent years. One of its goals is to grow its men's business, which totaled 23% of revenue in fiscal 2019. But men's revenue grew a cumulative 77% over the last two years, much faster than women's. One of the big sellers in the men's category has been the ABC pant, which is part of Lululemon's On the Move collection designed for all occasions.
Lululemon's approach is paying off
The company's unique design process is helping the brand gain market share in the apparel category against Nike and Adidas. But it is not resting on its laurels. Management sees opportunities to continue broadening its assortment to address more-specific needs for customers. As it does that, Lululemon's best days may still be ahead.
10 stocks we like better than Lululemon Athletica
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Lululemon Athletica wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of June 2, 2020
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.