lululemon athletica‘s (NASDAQ:LULU) stock has surged roughly 650% over the previous 5 years because the high-end yoga and athleisure attire maker has repeatedly impressed buyers with its strong gross sales progress.
It expanded its brick-and-mortar footprint as different attire retailers shut down, it maintained its premium model attraction at the same time as cheaper opponents entered the market, and it locked in clients with free yoga lessons and neighborhood occasions.
However after these huge features, buyers is likely to be questioning if Lululemon’s stock is getting overheated at greater than 50 instances ahead earnings. That valuation may appear excessive for an attire retailer, however I imagine that premium is justified, for 3 easy causes.
1. Constant gross sales progress
Lululemon’s income rose 24% in 2018, and grew one other 21% in 2019. Its direct-to-consumer (DTC) gross sales, which primarily come from its on-line and brick-and-mortar shops, elevated by 45% in 2018 and 35% in 2019. Its DTC gross sales accounted for 26% of its gross sales in 2018 and 29% of its gross sales in 2019.
Within the first 9 months of 2020, Lululemon’s income rose 4% yr over yr to $2.67 billion, even after the pandemic shut down its shops within the first half of the yr. Its gross sales dropped 17% within the first quarter however rose 2% within the second quarter and 22% within the third quarter as its e-commerce gross sales accelerated and its shops reopened.
On a continuing forex foundation, Lululemon’s DTC income rose 70% yr over yr within the first quarter, 157% within the second quarter, and 93% within the third quarter. That strong progress enabled Lululemon to bounce again a lot sooner than different athletic attire retailers.
By comparability, Nike‘s (NYSE:NKE) income fell 4% in fiscal 2020 (which resulted in May) and dipped 1% within the first quarter of 2021. Adidas‘ (OTC:ADDYY) income plunged 20% yr over yr within the first 9 months of 2020. Lululemon did not present any steering final quarter, however analysts count on its income to rise 8% this yr and 25% subsequent yr.
2. The “Energy of Three”
Final yr, Lululemon unveiled its “Energy of Three” progress plan, which aimed to generate double-digit annual income progress by the top of 2023 by doubling its males’s income, doubling its digital income, and quadrupling its worldwide income. Lululemon’s administration reiterated its dedication to that plan throughout final quarter’s convention name, even because the pandemic briefly throttled its progress.
Lululemon’s gross sales of males’s attire solely generated 21% of its income within the first 9 months of 2020, however that share may rise because it prioritizes new product launches. Its digital gross sales must also proceed rising as extra brick-and-mortar consumers begin making purchases on-line.
Lululemon solely generated 15% of its income exterior of the U.S. and Canada within the first 9 months of the yr, however its abroad income is rising by double-digit percentages. The APAC (Asia-Pacific) area is main that progress, and its income from China greater than doubled yr over yr within the third quarter.
Wanting forward, Lululemon’s current acquisition of Mirror, a distant exercise start-up that streams video exercises to a $1,500 wall-mounted machine, may assist it problem Peloton Interactive (NASDAQ:PTON) within the dwelling exercise area and develop its booming e-commerce enterprise. The upcoming launch of its first shoe assortment in early 2022 may additional strengthen its model, diversify its portfolio past attire, and widen its moat towards Nike, Adidas, and different business friends.
3. Secure margins and earnings progress
Lululemon’s gross and working margins expanded in each 2018 and 2019. However through the first 9 months of 2020, its gross margin dipped 40 foundation points yr over yr to 54.3%, whereas its working margin fell 480 foundation points to 13.5%.
It attributed these declines to COVID-19 bills, markdowns, larger success prices for on-line orders, and digital advertising and marketing bills for Mirror. However Lululemon nonetheless maintained constantly larger margins than Nike and Adidas, which ended their newest quarters with gross margins of 44.8% and 50%, respectively.
Nonetheless, Lululemon’s contracting margins nonetheless diminished its web earnings by 25% yr over yr to $259.1 million through the first 9 months of 2020. Analysts count on its earnings to drop 8% for the complete yr.
However subsequent yr, analysts count on its earnings to leap 48% because the pandemic headwinds wane and its income progress accelerates once more. Traders ought to all the time be skeptical of analysts’ long-term forecasts, however that progress fee suggests the stock is not too costly at 50 instances ahead earnings.
The important thing takeaway
Lululemon’s resilience all through the retail apocalypse and the COVID-19 pandemic, which compelled many retailers to file for chapter, signifies it is nonetheless a “greatest in breed” participant in a crowded sector. So long as it continues to develop its digital and brick-and-mortar presence, stays targeted on its “Energy of Three” objectives, and maintains its model attraction, its stock must be effectively worth the chance — even when it trades at a premium to different attire retailers.