How does Vuori stand up to Lululemon?

When athleisure brand Vuori launched in 2015, it was headquartered in a garage, only sold men’s shorts, and couldn’t get investors to set their hours.

The Carlsbad, Calif., retailer raised $825 million in a funding round that valued the company at $5.5 billion in November, including General Atlantic, SoftBank and Norwest Venture Partners. The company is currently expanding globally with the support of a series of major investors.

He is the envy of incumbents such as lululemon, of the gap Athleta and Levi’s Beyond Yoga, the company plans to be one of the retail industry’s largest IPOs when it ultimately files to go public, according to people close to the company.

“This is a notable deal in this category… We haven’t seen a lot of deals in that market over the past few years, and the deals that have been done so far have been rather challenging or “In a more value-oriented context,” Matthew Tingler, managing director in Baird’s global consumer and personal investment banking group, said of the recent funding round.

“Vuori is bringing a lot of excitement and growth to the market,” added Tingler, a sports apparel expert who was not involved in the deal. “In some ways, they’re gaining a broader share of the athleisure market…They’re challenging traditional players like Athleta and Lululemon.”

Vuori has grown from an unknown brand to one of the most respected independent apparel retailers on the planet, with strong sales growth and consistent profitability, and a crowded space that embraces athleisure on the California coast. It won the hearts of consumers.

“Vuori competes with differentiated products, differentiated brands, differentiated store experiences and differentiated materials,” Vuori CEO and founder Joe Kudler said in an interview with CNBC. spoke. “When we surveyed our customer base, we found that [and ask]’Why is Vuori so special?’ They’ll say it’s because of our products, the comfort, the textiles, the fabrics we carry and the fit. We are all about product, product, product, which ultimately leads to superior performance in the industry. ”

Despite its success, Vuori faces challenges ahead. The company operates in the crowded athleisure sector, but analysts aren’t convinced it will grow as quickly as in the past. Some see this segment as one of the fastest growing apparel categories, but expect the category to slow as consumers tend to dress up after years of dressing down. There are some people.

Customers also appear to be concerned about whether Vuori’s products will remain the same as it scales up and faces the demands of being a publicly traded company.

“If you look at message boards right now, the number one concern for Vuori consumers is that the quality of the fabric will go down.” Strategy Director at Eatbigfish and Challenger Brand Expert Liston Pitman said: “Are you going to water down the brand I love in exchange for growth?”

Additionally, Vuori faces the same issues as other consumer discretionary companies. Demand is volatile as retailers are forced to work harder to capture customer benefits and consumers think twice before purchasing what may be a want rather than a need.

Not much is known about Vuori’s financial performance as it is still private. However, analysts estimate that the company generates about $1 billion in annual revenue, and the company says it has been profitable since 2017.

Although its sales represent a small portion of the $431 billion global athleisure market, according to Euromonitor data and Earnest sales estimates, Vuori has experienced steady growth and is expected to dominate the entire sportswear market from at least 2020 onwards. exceeds. As of the end of October, Vuori has grown sales by 23% so far this year, while the overall sportswear market is expected to grow by 4.3%. The same market grew 44% last year, compared to only 2.4% for the sportswear market.

Jefferies managing director and retail analyst Randy Connick said Vuori and fellow startup Aroyoga have been so successful in part because they’re taking market share from Lululemon. As it expands into new categories, it said its core customer base is being alienated.

“Five years ago, Alo and Vuori… nothing was hamburger. And back then, Lululemon, whatever it was, was growing 20% ​​a year, maybe more. Today, the numbers… I look at it and I’m like, wait a minute, business is flat,” Connick said., This refers to the Americas, which is Lululemon’s largest market. “It’s not growing, but it’s consistent with the rapid growth of Alo and Vuori. So…in my opinion, the data proves it’s a market share issue.”

Analytics firm GlobalData found that Lululemon customers are spending more on Vuori than before. In 2018, 1.2% of Lululemon customers shopped on Vuori, but as of the end of November, that number had increased to 7.8%.

The longtime category leader last week issued a cautious outlook for the crucial holiday season as it grapples with slowing growth and product failures. The company did not ask about the competitive threats it faces, but acknowledged that growth among its core customers has slowed.

Vuori’s valuation and interest from private equity is growing as investors flee the consumer sector. Its success has some industry observers scratching their heads, wondering: How could a leggings and jogger company be worth so much in this economy? Analysts say that’s down to Vuori’s business model, its ability to grow profitably and its product range that resonates with shoppers.

Kudra said the company focused on profitable growth from the beginning because it had no other options. Unlike other direct-to-consumer brands that were raking in huge amounts of cash at the time, investors weren’t interested in the men-only brands that Kudla was promoting.

So he was forced to start his own company using funds from family and friends.

“We developed a working capital model where we self-funded the business, so we built very against the trends of the time and the result was a really great business with a lot of discipline. I did,” Kudra said. Before entering the fashion industry, she was a certified public accountant at Ernst & Young. “I used this complex spreadsheet to manage my entire business, so I could predict how every decision I made would impact my cash flow six months from today.”

To save money, Kudler didn’t pay himself for two years and hired employees who ran the business out of his garage and were compensated in exchange for stock. Perhaps most importantly, he built partnerships with suppliers to ease the cash-intensive burden of inventory acquisition and upfront payments.

“I started treating our suppliers like they were investors in the business and really helped them understand the vision of what we were building,” Kudra says. “I tried to convince our early factory partners to allow us to take inventory, sell it, and collect cash from our wholesale partners or sell directly to consumers to pay for the inventory. We were able to give them some really great terms, and that strategy ultimately led to us creating a working capital model that self-financed our growth.”

Vuori started as a purely online business, but Kudla didn’t see the value in partnering with wholesalers at a time when many founders in the direct-to-consumer space were against partnering with wholesalers. did. By getting his products on REI shelves in the brand’s early days, he was able to build awareness and gain customers in a way that didn’t deplete Vuori’s balance sheet.

“We started becoming profitable and generating free cash flow in 2017. Until 2019, we had no institutional investors or venture money involved in our business. In 2019 we were already very profitable. ” and was on a pretty strong growth trajectory,” Kudra said.

Years later, Kudla’s approach feels almost prescient. Many of Vuori’s DTC peers are now on the verge of bankruptcy, unable to make the unit economics of their business work. Investors no longer have patience with companies that don’t have a path to profitability.

Most brands and retailers now realize that selling exclusively online often doesn’t work. Partnering with wholesalers to open stores has proven to be important, alongside building direct channels online.

“I like it that way [Vuori is] “In the case of REI, it was one of their top accounts, and I think it was a different way to go into wholesale, but it was a very I think it was targeted wholesale.” We know that’s the customer who buys a certain type of activewear. ”

Investments in Vuori from General Atlantic and Stripes in November are further evidence of the strength of the balance sheet. The transaction was structured as a secondary tender offer, allowing early investors to sell their shares and obtain cash. With nothing left on the balance sheet, Vuori did not need new funding for its aggressive growth plans, including expansion into Europe. Kudra said, “We will open 100 stores by 2026 and expand into Asia.”

“We’re going to continue to grow the business the way we’ve always done it. It’s very calculated with a lot of discipline,” he said.

In many ways, brands vying for share in the crowded athleisure space can end up in the mix. Each company sells leggings and sports bras, trying to woo consumers with a unique blend of comfort, style, and performance. This is true for the apparel industry as a whole, and having a product that stands out is what separates the winners from the losers in the industry.

Vuori fans say the brand’s quality, fit, fabrics and comfort differentiate it from the competition and keep them coming back. Meanwhile, Lululemon’s product errors have been blamed for sluggish sales in the Americas, its largest region.

For the three months ended April 28, Lululemon’s sales in the Americas were flat as the company was unable to offer its leggings in the right color range and sizes customers wanted.

In early July, Lululemon launched a new pair of breath-through leggings designed for hot yoga classes, but the company ultimately pulled them from shelves after receiving complaints about the product’s fit. The lack of attractive new products is also limiting the amount Lululemon’s core customers can spend with the brand, the company said during its fiscal third-quarter earnings call on Dec. 5. The company said it expects assortments to return to historical levels. Trust expects 2025 to be a “key driver” of U.S. sales, especially as year-on-year comparisons become easier.

“They seem to be spying on where their customers are going…We have to remember that today’s consumers are not necessarily loyal consumers,” Ramirez said.

“Fabric is important, movement is important…If someone I know tells me there’s another brand, I’ll say, ‘Oh, that one holds me in better, I can run faster, and I don’t sweat as much. “I didn’t do that.” “I don’t think it’s that bad.” If it’s these very small things that matter in performance, people will give them a try. ”

— Additional reporting by Natalie Rice