Gap's Brick-and-Mortar Athleta Stores Face a Big Obstacle: Lululemon

Last Updated Apr 1, 2010 11:30 AM EDT

It looks like Gap Inc. (GPS) will soon test a brick-and-mortar version of its catalog and online-only Athleta women's sports line. Though this brand is well respected, the apparel giant faces an uphill battle against Lululemon Athletica (LULU), the leader in this retail sector -- especially since Gap stumbled pretty badly the last time it tried to launch a new chain.

Gap hasn't yet made public any big-time roll out plans for Athleta. The company plans to open its first location in Mill Valley, Calif., this spring, and a spokesman told the North Bay Business Journal that Gap is "testing a prototype to learn what works best for this athletic customer."

Don't expect Gap to just end it there, though. We're talking about a company that operates a global network of more than 3,000 stores. And through customer data collected from the Athleta Web site and catalogs, Gap's management probably already has a good idea of the geographic demand for the brand. During Gap's fourth-quarter conference call, Chairman and CEO Glenn Murphy said there will be more news about the "next level" for Athleta in the fall.

Whatever Gap's plans turn out to be, it faces a tough competitor in Lululemon. The company turned in a financially dominant fourth quarter, as sales at stores open at least a year soared 29 percent and profits nearly tripled to $28.5 million. Meanwhile, the Canada-based chain, which operates 124 stores, has 12 to 15 more on tap for the rest of the year. Clearly, Gap will have its work cut out for it if the company looks to take away some of Lululemon's rapidly growing market share.

Additionally, Gap's last roll out of a chain, the late Forth & Towne concept for women over 35, didn't work out, making one wonder if it just shouldn't concentrate on its big three -- Gap, Old Navy and Banana Republic. Management predicated Forth & Towne with some major hype and dumped $40 million into the brand only to shut it down after 18 months.

So maybe it's a good thing that Gap seems to be taking a slower approach this time. That way, if it can't compete with Lululemon or successfully draw in a new customer base, there won't be many losses to cut.