Retail Boogeyman Amazon Spooks Lululemon Investors With Hints Of Interest In Activewear

Amazon.com, Inc. AMZN's eventual entry into the activewear apparel line should have Lululemon Athletica inc. LULU's investors worried for four reasons, analysts at Canaccord Genuity said. The firm's Camilo Lyon maintains a Sell rating on Lululemon's stock with an unchanged $43 price target.

First, Amazon's entrance into the apparel space will likely compress industry margins, Lyon argued in his research report. Amazon will make use of its "ever-potent price weapon" to generate awareness and interest for its new athletic brand which would be consistent with prior strategies in new categories. This is "particularly disconcerting" for Lululemon given recent traffic decline woes and no efficiency or productivity opportunities to improve its margin structure.

Second, Amazon will likely present to the market a product that is of comparable quality to Lululemon's already high standards, the analyst continued. Lululemon doesn't hold any patent production on the material it uses and Amazon could partner with the very same manufacturer that produces up to 30 percent of Lululemon's apparel today.

Third, Lululemon's customer base will likely be the first to explore a lower cost alternative. Although the core Lululemon customer won't "necessarily jettison" to Amazon, recent proprietary checks show that customers who shop at Lululemon for fashion reasons represent 68 percent of total respondents. This implies that Lululemon isn't prepared for the longer-term threat of Amazon.

Finally, overall shopping trends among millennials are simply skewed towards online shopping and Amazon holds a key advantage in terms of holding "deep knowledge of its consumers' shopping tastes and behaviors."

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