Lululemon's Lack of Patents Makes It Vulnerable to Amazon Attack

(Bloomberg) -- Lululemon Athletica Inc. has a patent problem.

The yogawear maker lacks the intellectual property needed to mount a defense against Amazon.com Inc. encroaching on its market, according to Canaccord Genuity Corp. analyst Camilo Lyon.

That’s of particular concern since Amazon began using a top Lululemon supplier, Eclat Textile Co., to make a new line of private-label athletic wear. The Taiwanese vendor helped Lululemon develop its signature Luon fabric, as well as newer materials, Lyon said. Though Lululemon holds dozens of patents, they’re mostly focused on design aspects -- rather than making fabrics.

“Sharing manufacturers is not ideal, particularly with no patent protection,” he said in a report on Monday.

Amazon has already pushed into other fashion categories with its private-label brands, and now it’s making a foray into sportswear -- a move reported by Bloomberg News last week. That’s raised concern that Lululemon will see its market share and profit margins get squeezed by the e-commerce behemoth.

Shares of Lululemon fell almost 4 percent in the two days after the news was reported on Friday.

Lyon recommends selling Lululemon shares, which he expects to drop to $43. They closed on Tuesday at $58.93.

“We believe Amazon will use its ever-potent price weapon to create awareness for its emerging athletic brand, as it is wont to do when entering a new category,” Lyon said. “Assuming comparable quality of product and attractive pricing, we believe Lululemon’s fashion-driven customer is likely to be the first to explore a lower-cost alternative from Amazon.”

To contact the reporter on this story: Lindsey Rupp in New York at lrupp2@bloomberg.net.

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Lisa Wolfson