Why Lululemon Stock is a Buy in Our Book

Author: Finscreener

Estimated read time: 3 minutes

Publication date: 29th Dec 2020 14:33 GMT+1

It’s a cliché that rings very true: Opportunities lurk within every crisis. The pandemic threw multiple businesses out of gear and companies struggled to adjust to a new world. It opened up a massive opportunity for old-school businesses to go digital. Some companies were able to embrace the change and some weren’t.

Lululemon Athletica (NASDAQ: LULU) is one company that managed to make a successful transition and the results show in the stock price. In its most recent quarter (Q3 2020), it grew sales by 22% to $1.1 billion and profit by almost 15%. Adjusted earnings per share increased 21% to $1.16 versus $0.96 last year, significantly ahead of everyone’s expectations.

The direct sales channel (that includes digital sales) for Lululemon now contributes almost 43% of the company’s revenue compared to 27% in 2019.

Lululemon also put on a show of confidence on December 1, 2020, when it announced an increase in its share repurchase authorization from $263.6 million to $500 million.


Lululemon's focus on growing the international business

While the company’s North American revenue increased by 19%, its international business grew by 45%. The Asia-Pacific market, in particular, came under focus. Revenue from China increased by over 100%. This is not a bolt out of the blue. Lululemon has tripled the number of stores it operates in Mainland China in the last two years, and the company says that its brand now resonates with both tier 1 and tier 2 cities.

While in-store sales in Europe are low because the continent is still under varying stages of pandemic lockdown, e-commerce sales have gone up by over 160% compared to the corresponding period last year.

One digital feature that has become a hit with Lululemon shoppers is the virtual waitlist that alerts shoppers when it’s their turn to enter the store and point-of-sale devices that help customers with issues like returning goods outside the store. These are small factors that go a long way in promoting the company’s digital-friendly image.


Pushing the Mirror advantage

Lululemon made its foray into the home fitness segment with its acquisition of MIRROR for $500 million earlier this year. CEO Calvin McDonald has called MIRROR a “light integration”. The company estimates MIRROR to add $150 million in revenue for 2020, an increase from the earlier estimate of $100 million.

This number is especially good when one considers that Lululemon has rolled out MIRROR in only 18 stores this year and on its website. CFO Meghan Frank had said, “We made the strategic decision to increase marketing spend for MIRROR in the second half to take advantage of current trends toward spending from home and capitalize on the opportunity to drive business during the holiday season and into next year.”

Lululemon is still integrating its products into MIRROR and will decide on a roll-out plan with total integration of all MIRROR products and services in hundreds of its stores from 2021. This segment is poised to explode.

When it comes down to it, international growth, a razor-sharp focus on expanding its digital capabilities, and leveraging its MIRROR acquisition have served Lululemon well at a time when people are moving to a casual dress code through the week thanks to the emergence (and stay) of the work-from-home culture.


The verdict

Lululemon has navigated the pandemic extremely well and analysts are not shying away from their expectations. The company stock currently trades at $355.13. Analysts have given it a target of $408.45, an upside of almost 15% from current levels. This stock is a buy in our book as it should outpace the S&P 500 and major indices over the next decade.

Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.