Cashing In On Yoga Boom With Unique Growth Plan

Once it's targeted a new market, the Vancouver-based designer and retailer of yoga-inspired athletic clothes sends out a team to promote the brand and get a handle on the new turf. They meet with key yogis, trainers, instructors and athletes in the area and encourage them to wear Lululemon's products. This effort helps establish the brand as one worn by top yogis in the area.

Also, before entering a market the company may set up a showroom to display a sampling of its products.

"Before a store opens they've already established themselves as a brand worn by the top instructors in that market," said analyst Paula Kalandiak of Broadpoint Capital.

The firm also may organize fitness and charitable events to help spread the word and build anticipation of the opening.

Once Lululemon opens a store, it continues grass-roots marketing through efforts such as in-store classes and community events.

The company also takes a unique approach to product development. It works with yogis and athletes and in local communities for constant research and product feedback.

Each store fosters relationships with local trainers and fitness instructors, called ambassadors, who wear and endorse the clothes. The ambassadors get a product allowance in exchange for feedback on what they like and don't like about the clothes.

A Healthy History

Executives weren't available for comment. But watchers say Lululemon's grass-roots marketing and unique approach to R&D have helped the nine-year-old firm rack up an impressive track record.

Over the past two years, sales have grown at an average 90% annual clip. In 2006, sales of stores open at least a year, or same-store sales, jumped 25% from the year before.

Stores open at least a year averaged lofty sales of about $1,400 per square foot. That's among the best in apparel retailing, the company says.

Lululemon, which went public on July 30, continues its winning streak. In the second quarter, sales rose 80% from a year ago to $58.7million. Earnings more than doubled to 7 cents a share. Same-store sales rose 30% from a year ago.

The momentum continues. On Oct. 16, management upped its third-quarter same-store sales forecast to a gain in the mid-30% range, compared with its previous view of a rise in the mid- to high teens.

Most of the increase, however, comes from the strength of the Canadian dollar, analyst Mark Rosen of Accountability Research says.

"Only a small part of it is related to the improvement in the sales outlook," Rosen said.

The company said it expects to top its earlier third-quarter profit guidance of between 5 cents and 6 cents a share.

Lululemon has made its mark selling its own brand of high-end yoga wear. It also sells gear for other activities such as dance and running. Though most of its customers are women, it recently rolled out duds that appeal to men.

As of July 31, the firm had 60 stores. Thirty-eight were in Canada, 17 in the U.S. and five overseas.

The company's clothes are priced at the high end -- about $80 to $100 for a pair of yoga pants, Rosen says. You may be able to buy a pair for $30 elsewhere, he adds, but it won't be the same quality.

Lululemon's duds are designed for rigorous athletic activity.

"Technically, it's been a leader in introducing new fabrics and new cuts," Rosen said. "It's reinvented yoga wear from what it was in the past."

Its clothes offer technical features such as a fabric that wicks away moisture. Another fabric is said to control odor.

Though it has borrowed some of these technical features from other athletic apparel designers, Lululemon is responsible for bringing them to the yoga category, Rosen says.

Lululemon boasts a unique approach to its entire business, says analyst Kalandiak. Many of its salespeople are involved in yoga and other sports. They're required to talk to customers and solicit comments about products, she says.

Management provides new sales associates with a good education on the technical design and advantages of each product, and on yoga and fitness in general, Rosen says.

Expanding South Of The Border

Followers expect the company to maintain its momentum. Analysts polled by Thomson Financial expect profit to nearly triple to 34 cents a share for the 2007 fiscal year that ends in January, then rise 62% in 2008 and 36% in 2009.

The company hopes to benefit from expansion. Lululemon's store growth plan will focus heavily on the U.S., says Kalandiak.

The firm expects to open 25 new stores in North America this fiscal year, including the eight new units in the year's first half. Most of this year's additions will be in the U.S.

It plans to open 30 to 35 new stores in North America in fiscal 2008, with most of the new ones in this country.

Kalandiak expects Lululemon to fare well in the U.S. She says the firm has done a good job of boosting demand for its products. People seek out its gear and are willing to pay top price for it.

"I think a lot of consumers in the U.S. are only now just starting to hear about Lululemon," she said.

Lululemon faces more competition in the U.S. than in Canada, says Rosen, but it doesn't face a lot of direct rivals.

"The real point 15f differentiation is their corporate culture and sales approach," he said.

Eventually the company could have between 300 and 400 stores in North America, watchers say.