This Is the Last Thing Lululemon Needs to Turn Its Business Around

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Does the footwear market really need another sneaker company? Lululemon Athletica (NASDAQ: LULU) thinks so and recently began offering three new styles of footwear at 23 of its stores with plans to roll them out to more in the future. While the market for sneakers is growing, it remains overcrowded and adding another one to the mix doesn't bode well for success.

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Made from whole cloth

Lululemon created something from nothing when it essentially started the athleisure trend that has since become a $44 billion industry in its own right and is expected to hit $83 billion by 2020, but like the footwear business, it now features a burgeoning number of participants.

Target just jumped in with an offshoot of its C9 Champion brand called JoyLab, that it described as "fitness-meets-fashion-and-function;" Gap (NYSE: GPS) will primarily be promoting only its Old Navy and athleisure-oriented athleta brands while pulling back on Gap stores and Banana Republic; and J. Crew, which long resisted the trend, finally put out a line of athleisure clothes earlier this year.

Many, though, are getting squeezed. This past summer Dick's Sporting Goods closed its two Chelsea Collection athleisure boutiques and while it may have been a case of too little, too late, J. Crew just announced that it was closing 50 stores by January. Yet even early entrants in the space are having a hard time, including Under Armour (NYSE: UA) (NYSE: UAA) and Nike (NYSE: UAA), with the former reporting North American revenues tumbled 12% in the third quarter and the latter saying apparel sales were down 1%.

To Lululemon's credit, its results were appreciably stronger. Last quarter net sales were up 13% on a 7% increase in comparable sales, though adjusted operating margins got constricted by 160 basis points to 12.8%.

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Tripping itself up

Lululemon has effectively dominated the women's athleisure market and is so far successfully branching out into the men's market, but in a footwear market dominated by Nike, but with incredibly intense competitive pressure from Adidas and Skechers, tackling footwear might not be the best use of Lululemon's resources to further extend its presence.

A few years ago, bankrupt surf-and-skate shop Pacific Sunwear also once thought women's shoes was an "underserved" market to be tapped as a means of pulling itself up out of a tailspin. Whatever the woman's shoe market was at the time, underserved wasn't it, and as the "bankrupt" qualifier attests, it did nothing to help PacSun improve.

Analysts are divided over whether the athleisure trend is one that's run its course or still has legs to run. As the figures cited earlier suggest, sales are expected to expand over the next few years and if the fashion style goes global, it could hit more than $300 billion worldwide.

Yet others feel that its time is over as denim makes a comeback. According to retail technology company Edited, denim jeans for women surged 79% over the first six months of 2017 compared to the year-ago period, while athleisure leggings, grew just 35%. So although it's not a case that athleisure wear is dying out, it may not be the same growth vehicle it once was. 

Lululemon remains a leader, but it has matured and is now relying upon warehouse sales to move merchandise. A Canaccord analyst fears the increased frequency of the sales means profits will be narrowed, and now it's turning to a market that is suffering weakness of its own.

Basketball sneakers, in particular, are in their second year of decline with sales down 20% this year while NPD Group says activewear footwear sales generally are down in the low single-digits.

Like PacSun before it, Lululemon may find that trying to grasp onto footwear as the angle that lifts up an arguably sagging business merely causes it to stumble harder. Sneakers may be even more oversaturated than athleisure outfits and just as it found trying to break into the children's market, Lululemon Athletica may trip over the decision to get into sneakers.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike, Skechers, and Under Armour (C Shares). The Motley Fool recommends Lululemon Athletica. The Motley Fool has a disclosure policy.