Retail Stocks Imitate Technology: lululemon is to Apple as Gap, Much to its Regret, is to Microsoft

The latest BusinessWeek goes inside an escalating retail battle. Gap (GPS) is taking on Lululemon (LULU), the seemingly unstoppable sushi-eating, fashion-embracing, yoga-practicing hipster shop where you can pick up a $108 hoodie or $78 pair of shorts between workouts.

But Gap has been in the retail game for longer, has plenty of stores and experience. It also has a high-end athletic wear chain, Athleta. So could Gap end Lululemon’s streak of sun salutations?

LULU Chart

LULU data by YCharts

That's unlikely. Gap’s Athleta taking on Lululemon has shades of Microsoft (MSFT) trying to conquer Apple (AAPL). Here's why we make the comparison:

1) It got a late start

The tablet computer debuted in 2010 and was an immediate runaway success. Apple sold 32 million iPads last year for $20 billion. Yet Microsoft didn’t introduce a competing product until last month, and even then its product doesn’t come out until this fall.

Similarly, Lululemon’s founder started in 1998 and grew to $149 million sales in 2007 before Gap took notice. Only after Lululemon went public, Gap spent $148 million in September 2008 to buy California-based Athleta, a store and catalog business, to create competition in the high-end women’s gear space. And at the start of last year, Gap had managed to open just one Athleta store.

You can see some similarity in the companies' revenue trajectories.

MSFT Revenue TTM Chart

MSFT Revenue TTM data by YCharts

2) It doesn’t understand what its customers want

Lululemon understood from the start that its store was not just yoga gear. It was, like Whole Foods (WFM), a hub for people embracing a healthy lifestyle. And it, like Apple, created showrooms where shoppers could interact with people who passionately embraced its products.

The main selling point of Gap’s Athleta, by contrast, is a lower price point. Microsoft tried in vain with its “I’m a PC” ads to make affordable stuff cooler. But consumers who flock to Lululemon could get workout gear at Target if they wanted. Price is not the point. But profits are:

MSFT Net Income TTM Chart

MSFT Net Income TTM data by YCharts

3) It’s just a bad knock-off of the cooler version

Lululemon, besides being a lifestyle store, is high end. It’s known for personalized service. Athleta tries to mimic that using, among other things, whiteboards by customers' dressing rooms -- but it doesn't succeed. On Yelp (YELP), some Lululemon stores get an average of four and five stars from reviewers while Athleta stores get three and four stars. And people who want to vent have taken to, where Athleta gets 2.5 stars. Some of the complaints: products are out of stock, merchandise doesn’t justify the price, and bad customer service.

Microsoft, similarly, is just another company knocking off Apple’s forward-thinking designs. When its Surface came out, pundits applauded some clever new elements, but they weren’t left dying to buy one. It’s more of a product consumers will settle for if they can’t get their hands on an iPad.

MSFT Profit Margin Chart

MSFT Profit Margin data by YCharts

4) What’s Athleta? What’s Bing?

Four years after Gap purchased Athleta to get big in the yoga business, you’d be hard-pressed to find a customer who’s even heard the name. As for sales, those seem lackluster. Gap said that Piperlime and Athleta had combined sales of $301 million last year, which compares to Lululemon’s $1 billion for 2011.

This July, Microsoft posted a loss when it took a $6.19 billion charge for its online division. That includes Bing, the search engine no-one uses, and MSN, the portal no-one uses. When it made the write-down that essentially erased its purchase of aQuantive, an analyst told the New York Times that “the industry has evolved beyond where aQuantive was when Microsoft bought it.”

MSFT Return on Assets Chart

MSFT Return on Assets data by YCharts

Gap can find out the hard way, or just read up on Microsoft. When you try to get into a business that you don’t understand but others do, you’re setting yourself up for a big, fat, expensive failure.

From the editors of YCharts.YCharts Pro Investor Service includes professional stock charts, stock ratings and portfolio strategies.



Please note that this feature is only available as an add-on to YCharts subscriptions.

Please note that this feature requires full activation of your account and is not permitted during the free trial period.

Start My Free Trial {{}} No credit card required.

Already a subscriber? Sign in.