Is Lululemon Stock a Buy?
lululemon athletics (NASDAQ: LULU) has grown tremendously over the years, focusing on niche categories in the sports space, most notably clothing designed for yoga. But it has successfully spread to other categories including outerwear, lifestyle and even golf wear. Revenue increased from $ 452 million in fiscal 2009 to $ 3.98 billion in fiscal 2019.
Before the coronavirus pandemic, the business was in full swing, indicating an opportunity for massive growth. Revenue increased 21% last year, driven by a 35% increase in online sales. Even with sales declining after stores close due to COVID-19, investors are not progressive.
The stock is up 33% year-to-date and is trading at a high price-to-earnings (P / E) ratio. I own shares, which currently represent 4% of my holdings. While I am happy with my holdings and not adding more stocks to these highs, I am definitely not selling. My reasons for sticking with it could be the reasons for another investor to take the plunge.
No layoffs during COVID-19
When Lululemon announced the closure of all of its stores in North America and Europe in March, the company also announced that employees would continue to receive full pay for all hours that would have been scheduled.
On the first fiscal quarter conference call in June, CEO Calvin McDonald explained the move:
We believe that by supporting our collective and helping them navigate the daily realities of this time, we will build even stronger relationships and increase the already strong loyalty and trust in Lululemon. These decisions are good for our employees and for our brand. While there is a short term impact on our P&L, these investments will serve us well in the long term.
Little things like this say a lot about a company’s culture. At the secondary level, he emphasizes that it is a business on the move. Lululemon has too many growth opportunities to lay off employees during a recession.
Lululemon has one of the best digital operations in retail
More than ever, customers are turning to e-commerce, and Lululemon can certainly call it an area of strength. Direct-to-consumer revenue, including sales through the website and mobile app, jumped 68% year-over-year in the last quarter and 70% at constant exchange rates. E-commerce accounted for 54% of total revenue in the last quarter, up from 28% in fiscal 2019.
During the first quarter call, Senior Vice President Meghan Frank attributed the acceleration in digital traffic to investments in digital marketing and conversion, strong customer response to products, and investments made to improve the online shopping experience.
The first stages of international expansion
Lululemon has grown steadily outside of North America for several years now, but overseas operations started from a very small base, so there is still a long way to go to reach its potential.
Revenue outside of the US and Canada grew from $ 245.6 million in fiscal 2017 to $ 475.8 million last year, which is only 12% of total revenue.
“Our brand clearly resonates in our international markets and we continue to believe that we can quadruple this activity from 2018 levels by 2023,” McDonald said on the first quarter call.
Always finding ways to expand your target market
Lululemon’s strategy is to cultivate a sense of community around the brand, which dates back to its founding as a niche yoga store in Vancouver, Canada. This partly explains the rationale for the recent $ 500 million acquisition of MIRROR.
The interactive home fitness service will bring a subscription element to Lululemon’s annual revenue. On a conference call about the deal in late June, McDonald said, “The MIRROR brand fits naturally into our vision. […] Our vision is to be the experiential brand that ignites a community of people who experience sweat through sweat, grow and connect. ”
Investors should also watch out for the potential extension of the category to shoes, which McDonald’s highlighted as a growth opportunity during the Analyst Day presentation in April 2019.
The share can grow until it is valued
No doubt, Lululemon’s valuation is high. The forward P / E is currently 74. But then again, COVID-19 has just caused a sharp acceleration in its e-commerce revenues. Investors are probably taking into account the potential for long-term margin expansion as sales through digital channels generate a high operating margin of over 40% compared to less than 30% for physical stores.
Part of the high forward P / E is due to lower profits expected this year due to recent store closings. Next year, analysts expect earnings to rise to $ 6.25, which would bring the P / E down to 50. This shows how quickly the current valuation can drop once the challenges of COVID- 19 will have subsided and Lululemon will resume earnings growth.
Lululemon still has significant expansion opportunities. It will be a much bigger business 20 years from now than it is today. If you are not tired of paying for growth stocks, Lululemon should be a great long term investment.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.