* Vancouver-based retailer inspires enduring fashion trend
* Copycats suggest Lulu's niche has entered mainstream
* Lulu has loyal following but may be vulnerable on price
* Trendy upstart chains include Lolë, Lorna Jane
* Gap Inc's Athleta targets 50 U.S. stores by end of 2013
By Allison Martell
TORONTO, Dec 7 (Reuters) - When Lululemon Athletica Inc opened its first U.S. shop in 2003, its form-fitting yoga pants, free classes and Pacific Northwest vibe were a revelation to its new American customers. They had never seen another retailer like it.
But time has caught up with the Vancouver-based retailer. Lululemon, closely watched by investors because of its meteoric rise, now faces a cluster of competitors whose stores and products bear a striking resemblance to its own.
Montreal-based Lolë, Gap Inc's Athleta and others are expanding aggressively in the United States. They could threaten Lulu's stellar growth and robust brand, especially by competing on price.
Conversely, Lulu could reap more growth from the expanding market for premium fitness wear, building on its 10 years of dominance in North America and its aggressive push into European and Asian markets.
Lululemon shareholders have had a very good run so far. The stock is up more than seven-fold since its 2007 debut and fitness-minded women have developed a fierce loyalty to the brand. Lululemon says it offers superior quality and if sales and earnings growth are any guide, customers agree.
According to research firm Retail Sails, Lulu is one of the most productive U.S. retail chains, lagging only Apple Inc and Tiffany & Co in sales per square foot.
The gravy train may not last forever. On Thursday, Lulu forecast a sharp slowdown in sales at its established stores in the crucial fourth quarter. The company said November got off to a slow start because of "consumer distractions that negatively impacted many retailers" and a glitch with its promotional emails through the Thanksgiving weekend.
The copycats can, however, be viewed as a positive development for Lulu, suggesting the niche it defined is not a passing fad. Chic, feminine apparel specifically designed for yoga and other fitness activities has entered the fashion mainstream.
In that respect, the rise of yoga wear is not unlike the ascendance of blue jeans in the 1970s, said Bernard Mariette, chief executive of Coalision Inc, the closely held Montreal company behind the Lolë concept.
"I really believe that, especially for women, both fashion and technical are merging," Mariette said. "You cannot have technical clothing for ladies which is not feminine and beautiful."
The challenge to Lulu is coming from at least three fronts: trendy upstarts such as Lolë; cheaper athletic brands such as Under Armour Inc and fashion retailers that are expanding into workout gear.
Lululemon has vowed to use its design patent portfolio to protect its core products. In November, it settled a suit against PVH Corp's Calvin Klein and G-III Apparel Group Ltd.
Mariette, who aims to expand Lolë to 50 stores from 11 in the next five years, sees room for plenty of brands in the emerging category. Mass-market retailers such as Gap reach a different audience than brands with more "authenticity" such as Lolë, Lululemon and closely held, U.S.-based, Prana, he says.
Mariette launched Lolë's retail concept in 2010 and brought in a high-fashion designer, Andy Thê-Anh, better known for evening wear. Sales have risen 60 percent over the last two years and Mariette says Lolë is "very profitable."
At Lolë's Toronto boutique, tucked in an upscale mall, mannequins in yoga pants are lined up alongside racks of colorful tank tops and an advertisement for free Zumba classes - a kind of Latin dance aerobics.
Lolë's success was one reason Kilmer Capital Partners, a Toronto private equity firm, decided to take a controlling stake in Coalision in 2008, according to Kilmer's president, Anthony Sigel. He said the firm saw a big market in clothing for women interested in fitness and getting outdoors.
Lolë's "growth rate was pretty compelling," Sigel said. "It was a combination of our sensing that the sector had a lot of growth (and) it wasn't just an idea. They had already proven it."
A second newcomer is Australia's Lorna Jane, with more than 120 stores in Australia and New Zealand, and plans to open at least 11 in southern California this year, and another 20 in 2013, according to a release from September.
Prana, which Liz Claiborne Inc sold back to its founders and a private equity firm in 2008, has six stores in the United States and distributes its yoga and climbing wear to specialty retailers around the world.
But those privately held brands are small fry against the likes of Gap's Athleta banner, which wants 50 stores by the end of next year. The chain offers free classes, like Lululemon, Lolë and Prana, while handily undercutting them on price.
At the same time, well-known athletic brands such as Nike Inc and Under Armour are offering more yoga-inspired gear for women and some traditional apparel brands across the price spectrum are rolling out gym wear.
Anne Rivers, a branding expert with BAV Consulting who tracks consumer attitudes about Lululemon and other brands, says small players such as Lolë pose little threat. But she doesn't believe that Lululemon is invulnerable.
"I think the bigger risk would be if somebody like Under Armour was trying to take them on, which I think they are now," said Rivers.
Lulu seems to be moving further into its competitors' turf, making more clothing for outside the yoga studio, said Brian Sozzi, chief equities analyst at NBG Productions.
In the fall, Lulu rolled out a line of office-friendly cycling clothes and in recent weeks it has featured goose down vests and jackets and Merino wool sweaters. It is also offering more menswear.
While the broader focus can help Lulu grow, it opens it up to even more competition.
"Over time, what could happen is that the customer says, 'You know what? I can get comparable products from Nike or Under Armour at a decent price,'" Sozzi says.