Lululemon Treads Into Sneaker Space

As the athletic apparel retailer dips its toes into the women’s sneaker market, slow and steady is probably the right pace.

By guest author Jinjoo Lee from the Wall Street Journal.

Leggings leader Lululemon LULU 5.58% is stepping into the women’s footwear category. Is it getting into it for the right reasons?

Similar to other athletic apparel brands—including Nike and Adidas—Lululemon shares have lost ground this year as investors fretted about supply-chain issues and possible damping in consumer demand as inflation pushes up the cost of everything. Nevertheless, Lululemon’s announcement of a women’s sneakers launch earlier in March seemed to have gotten investors excited. Its shares have risen 7.5% over the past month, outperforming Nike and Adidas, which are each up about 2 %.

Footwear yields lower margins compared with apparel, so an entry into that market could be something of a mixed bag for Lululemon, which is more profitable than its athletic peers. Its 57.7% gross margin last fiscal year was closer to that of luxury conglomerate Kering, which owns Balenciaga and Gucci, than Nike’s 46%.

Some investors might view Lululemon’s entry into a new category as a red flag if it is an indicator that the company is seeing limited avenues of growth within its core business. Its entry into the fitness-equipment business in 2020—through its acquisition of Mirror—has so far proved to be underwhelming. But the company’s results, announced late Tuesday, seem to indicate that Lululemon’s foray into footwear is more of an offensive move than a defensive one.

After seeing 42% revenue growth for the fiscal year ended Jan. 30, Lululemon said it expects sales to rise by 20% to 22% this fiscal year—a much healthier pace than the 15.6% that Wall Street analysts were penciling in, on average. Lululemon expects much of that growth to come from its core apparel business. Its shares gained 7.7% in after-hours trading following the earnings call. Lululemon Chief Financial Officer Megan Frank said footwear will be a “test-and-learn” category and that it will be a small portion of the business in 2022.

Lululemon might be well-placed to gain traction in the category if it can get its loyal base of customers excited. Women who bought from Lululemon spent 30% of their total activewear purchases there in the fiscal year ended in January, according to data from NPD Group. Fabletics, Under Armour and Adidas each capture less than 10% of those customers’ activewear purchases, according to NPD.

One question going forward will be whether Lululemon is trying to do too much at once. In addition to footwear, it is launching its first tennis collection this week and golf collection next week. It also will be juggling the opening of 70 net new stores in 2022—a higher pace than normal.

Baby steps might be the right pace for its new footwear business.