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Lululemon Finds Lucrative Niche in Yoga

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Going public in 2007, its market cap is nearly $2 billion now.

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In the outer borough of Brooklyn in New York, there's a small war going on along the shady and tree-lined thoroughfare of Court Street. Factions have formed and residents have chosen sides.

The faux war is between yoga studios. Once the home of only one, Court Street now holds three, all within brief walking distance of each other. Some teachers from the original one opened the new locations. Their competition also comes from gyms in the area like the YMCA, which offer classes.

Across the city, specifically in well-to-do neighborhoods, it seems yoga is everywhere; as hard to miss as street vendors selling hot dogs and pretzels. It seems there are two degrees of separation, at most: Either somebody does yoga or, if not, knows someone who does. Discussing yoga routines in Manhattan is as fashionable as trading stock tips a few years ago.

It's not surprising then that yoga, apart from its spiritual and health benefits, is a lucrative business. Look no further than Lululemon Athletica (LULU), a yoga apparel company that has stamped its logo (in this case, an omega-like A) on the flourishing market. Their outfits are for women as football jerseys are for men on Sundays.

The brand's following in New York and elsewhere -- particularly among middle- to high-income women -- borders on the devout. For this reason, Lululemon has performed admirably in the middle of a treacherous retail environment.

Lululemon went public in 2007 and its market cap is nearly two billion now. In its second quarter, which ended August 2, the company reported a 17% drop in profit to $9.2 million, compared with $11.1 million in the same quarter last year. Sales actually jumped 14% to $97.7 million. Both were better than what analysts predicted.

Chip Wilson, who started Lululemon in Vancouver, opened the first store in 2000. Today there are 115 in the United States and Canada. Lululemon is one of several athletic brands Wilson has founded. (The name has no meaning; based on the appeal of the letter L in his past brands, Wilson challenged himself to put as many Ls in one name as possible.) The company culture professes good karma and spiritual living.

Lululemon's dominance of the yoga-apparel market begins with its signature piece: the $98 Groove Pant. The Groove Pant and other items are made out of form-fitting Luon, a fabric worshipped for its slimming and shaping abilities. Lululemon also makes tops, tanks, jackets, and crops, as well as sports bras like the Ta Ta Tamer. "Luluheads" -- as enthusiasts are called -- clamor for the stuff.

Lululemon has four stores in Manhattan and a brand-new one in the Brooklyn neighborhood of Park Slope. They're usually crowded. Over the summer, hundreds regularly turned out for Lululemon's twice-weekly free yoga classes in midtown Manhattan's Bryant Park. Elsewhere, in moneyed neighborhoods, it's hard to miss the brand. Many female celebrities have let it be known that they're Luluheads. There are also Lululemon fan blogs and hundreds of Facebook groups.

I have a friend who's a yoga instructor in New York and thus an eyewitness to the Lululemon takeover. He likes the brand and hears positive testimonials all the time for its apparel.

Still, it isn't all bliss. He showed me a yoga history book which defines the yamas, or rules of conduct for living. One yama, I read, says you're not supposed to acquire more than you need. In other words, don't be greedy. Yoga, he told me, is meant to strip down your life. He could see how making a lot of money from selling expensive apparel isn't 100% spiritually kosher.

That said, for the time being, there are few complaints. Lululemon couldn't be more popular, and it seems that as long as yoga remains fashionable, it'll be cloaked in Groove Pants.
No positions in stocks mentioned.

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