Lululemon lost $5.5 billion valuation as Vuori gained market share.

• After an investment round led by General Atlantic and Stripes, Vuori reached a valuation of $5.5 billion.
• At a time when many investors are leaving the consumer sector, private equity's interest in Vuori, an athleisure company, highlights the profitability of its business model, which distinguishes it from competitors.
• CNBC reported that a California-based company, renowned for its athletic wear, is considering going public, according to sources.

In 2015, Vuori, an athleisure brand, started in a garage and initially focused on men's shorts, with no success in attracting investors.

The Carlsbad, California-based retailer is expanding globally with the support of high-profile investors such as General Atlantic, SoftBank, and Norwest Venture Partners, after raising $825 million in a November funding round that valued the company at $5.5 billion.

The retail industry's biggest IPO is poised to be Athleta, which has become the envy of incumbents such as Lululemon and Beyond Yoga.

Matthew Tingler, a managing director in Baird's global consumer and retail investment banking group, stated that the recent funding round is a significant deal for its category, as there have been few deals in that market over the past couple of years, and the ones that have occurred have been more challenging or value-oriented.

"Tingler, an expert in the athletic apparel space, stated that Vuori is bringing excitement and growth to the market. According to Tingler, Vuori has been taking share in the athleisure market and is challenging the legacy players of Athleta and Lululemon."

With its coastal California take on athleisure, Vuori has become one of the most highly valued private apparel retailers on the planet, experiencing robust sales growth and consistent profitability.

"Vuori CEO and founder Joe Kudla stated in an interview with CNBC that the company's success is due to its differentiated product, brand, store experience, and materials. According to Kudla, if customers were asked to explain what makes Vuori unique, they would cite the comfort, textiles, and fit of the products. Kudla emphasized that Vuori's focus on product is what sets it apart in the industry and leads to great performance."

Although Vuori has been successful, the company faces challenges due to the uncertainty of the growth rate of the athleisure industry. While some analysts predict it to be one of the fastest-growing apparel categories, others anticipate a slowdown as consumers shift their focus from casual to formal attire.

As Vuori grows and becomes a publicly traded company, customers are concerned about whether the company's products will remain the same.

"According to Liston Pitman, a strategy director with Eatbigfish and an expert in challenger brands, consumers of Vuori are currently most concerned about the quality of the fabric and whether it will fall. They are also worried about whether the brand they love will be watered down in exchange for growth."

Like other consumer discretionary companies, Vuori faces challenges in the retail industry, including increased competition and fluctuating consumer demand.

Vuori pulls ahead in the yoga wars

Despite its private nature, analysts estimate that Vuori generates approximately $1 billion in annual revenue and has been profitable since 2017.

Despite being a small player in the $431 billion global athleisure market, Vuori has experienced consistent growth and outperformed the overall sportswear market since at least 2020, according to Euromonitor and Earnest sales estimates. As of October, Vuori has increased sales by 23% this year, while the overall sportswear market is projected to grow by 4.3%. In 2020, Vuori grew 44% while the sportswear market expanded by only 2.4%.

Jefferies managing director Randy Konik stated that Vuori and Alo Yoga have gained success due to taking market share from Lululemon, which he said has lost its primary customer base by expanding into new categories.

"Five years ago, Alo and Vuori were nothing burgers, and that's when Lululemon was growing 20% a year, whatever it is, or more. Today, you look at the numbers and you're like, wait a second, the business is flat," said Konik, referring to Lululemon's largest market, the Americas. "It's not growing, and yet it's coinciding with the hypergrowth of Alo and Vuori. So, in my opinion, the data proves that that is a market share issue."

Lululemon's customers are now spending more at Vuori than they did previously, with the percentage of customers shopping at Vuori growing from 1.2% in 2018 to 7.8% as of the end of November.

The longtime category leader gave a cautious outlook for the holiday shopping season, citing slowing growth and product missteps, but did not mention any competitive threats. However, it acknowledged that its core customer is slowing down.

Competitive threat

Despite the departure of investors from the consumer sector, Vuori's valuation and interest from private equity remain strong. The success of the leggings and joggers company has left some industry observers questioning its worth in this economy. Analysts attribute Vuori's success to its business model, growth potential, and product assortment, which has appealed to consumers.

Kudla stated that the company's focus on profitable growth from the outset was due to its lack of alternative options, as investors were not interested in funding a mens-only brand. Unlike other direct-to-consumer brands that were attracting significant investments, Kudla's brand did not receive the same level of support.

He was compelled to start the business with financial support from his loved ones.

"Kudla, a CPA for Ernst & Young before he started his fashion business, stated that they created a self-funding working capital model, which allowed them to go against the trend of the time and resulted in a successful business with strict discipline. He managed the entire business through a complex spreadsheet, enabling him to forecast the cash-flow impact six months in advance for every decision he made."

Kudla didn't pay himself for two years, ran the business out of a garage, and hired employees who were willing to trade equity for compensation. He also developed partnerships with his suppliers, which alleviated the cash-intensive burden of acquiring inventory and paying for it up front.

"Kudla shared that he began treating suppliers as investors in the business and helped them understand the company's vision. This approach led to early factory partners providing favorable terms, allowing Kudla to receive inventory, sell it, collect cash, and pay for inventory. This strategy ultimately funded the company's growth."

Kudla, unlike many other founders in the direct-to-consumer space, wasn't hesitant to partner with wholesalers, including REI, in the early days of Vuori. This strategy allowed him to increase brand awareness and acquire customers without draining the company's balance sheet.

Kudla stated that our business became profitable in 2017 and started generating free cash flow. There was no institutional capital or venture money involved in our business until 2019, when we were already very profitable and on a strong growth trajectory.

Vuori's DTC peers are now struggling to make their business profitable, and investors are becoming increasingly impatient with companies that lack a clear path to profitability.

To be successful, many brands and retailers understand that solely selling online is not enough. It is essential to collaborate with wholesalers and establish physical stores, in addition to developing strong online channels.

"Jessica Ramirez, senior research analyst at Jane Hali & Associates, said, "I appreciate how Vuori is handling growth. REI was one of their top accounts, and their approach to wholesale was unique and targeted, which aligns with the kind of activewear that their customers purchase.""

Vuori's November investment from General Atlantic and Stripes, structured as a secondary tender offer, did not add to the balance sheet, as early investors sold their shares and cashed in. Kudla stated that the company didn't require new funding for its growth plans, which include expanding into Europe and Asia and having 100 stores by 2026.

He stated that we will proceed with expanding the business in the same manner as we have consistently done so, which involves a great deal of planning and self-control.

Trouble at Lululemon

The crowded athleisure market is characterized by numerous brands competing for market share. These brands offer similar products such as leggings, sports bras, and a combination of comfort, style, and performance. Similarly, the broader apparel industry is also highly competitive, and the key to success lies in having unique and distinctive products.

Vuori's quality, fit, fabric, and comfort are what distinguish it from competitors and keep customers coming back, while Lululemon's product missteps have been attributed to a sales decline in its largest region, the Americas.

Despite not providing the desired color and size options in leggings, Lululemon's comparable sales in the Americas remained flat in the three months ending April 28.

Lululemon removed its new Breezethrough leggings from stores after receiving complaints about their unflattering fit. The lack of new products is limiting how much its core customers are spending with the brand. The company expects its assortment to be back to historical levels by 2025, which Truist anticipates will drive better U.S. sales.

Ramirez stated that it appears they've overlooked the customer's destination and that today's consumer isn't always loyal.

"Performance matters, and fabric and movement do too. If someone you know recommends a brand that held them in better, allowed them to run quicker, sweat less, and feel less gross, people will give it a try."

— Additional reporting by Natalie Rice