Why Lululemon’s action is worth the risk

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lululemon athletics‘s (NASDAQ: LULU) The stock has jumped about 650% in the past five years, as the premium yoga and sportswear maker repeatedly impressed investors with robust sales growth.

It widened its physical footprint as other clothing retailers closed, it maintained its high-end brand appeal even as cheaper competitors entered the market, and it blocked customers with yoga classes. free and community events.

But after these big gains, investors might wonder if Lululemon shares are overheated to more than 50 times expected earnings. This may seem like a high valuation for a clothing retailer, but I think this premium is justified, for three simple reasons.

Image source: Getty Images.

1. Steady growth in sales

Lululemon’s revenue grew 24% in 2018 and 21% in 2019. Its Direct-to-Consumer (DTC) sales, which primarily come from its online and brick-and-mortar stores, grew 45% in 2018 and increased by 35%. in 2019. Its DTC sales represented 26% of its sales in 2018 and 29% of its sales in 2019.

In the first nine months of 2020, Lululemon’s revenue grew 4% year on year to $ 2.67 billion, even after its stores were closed by the pandemic in the first half of the year. Its sales fell 17% in the first quarter but rose 2% in the second quarter and 22% in the third quarter as its online sales accelerated and its stores reopened.

At constant exchange rates, Lululemon’s DTC revenue grew 70% year-on-year in the first quarter, 157% in the second quarter and 93% in the third quarter. This robust growth has allowed Lululemon to rebound much faster than other sportswear retailers.

By comparing, Nike‘s (NYSE: NKE) revenue declined 4% in fiscal 2020 (which ended in May) and declined 1% in the first quarter of 2021. Adidas(OTC: ADDYY) revenue plunged 20% year-on-year in the first nine months of 2020. Lululemon gave no indication in the last quarter, but analysts expect its revenue to grow 8% this year and 25%. % next year.

2. The “power of three”

Last year, Lululemon unveiled its ‘Power of Three’ growth plan, which aimed to deliver double-digit annual revenue growth by the end of 2023 by double the income of his men, double its digital income, and quadruple its international income. Lululemon management reiterated its commitment to this plan in the last quarter conference call, even as the pandemic has temporarily slowed its growth.

Men's clothing from Lululemon.

Image source: Lululemon.

Lululemon’s men’s clothing sales generated just 21% of its revenue in the first nine months of 2020, but that percentage could increase as it prioritizes new product launches. Its digital sales are also expected to continue to increase as more physical shoppers start shopping online.

Lululemon only generated 15% of its revenue outside the United States and Canada in the first nine months of the year, but its overseas revenue is growing by double digits. The APAC (Asia-Pacific) region is leading this growth and its revenues from China more than doubled year-over-year in the third quarter.

Looking to the future, the recent acquisition of Mirror by Lululemon, a remote training startup that streams video workouts to a $ 1,500 wall machine, could help it meet the challenge. Interactive Platoon (NASDAQ: PTON) in the home training space and develop its booming e-commerce business. The upcoming launch of its first footwear collection in early 2022 could further strengthen its brand, diversify its portfolio beyond apparel, and widen its rift against Nike, Adidas and other industry peers.

3. Stable margins and profit growth

Lululemon’s gross and operating margins increased in 2018 and 2019. But in the first nine months of 2020, its gross margin declined 40 basis points year on year to 54.3%, while its operating margin declined. from 480 basis points to 13.5%.

He attributed those declines to COVID-19 spending, markdowns, higher fulfillment costs for online orders, and digital marketing spending for Mirror. But Lululemon has always maintained consistently higher margins than Nike. and Adidas, which ended their final quarters with gross margins of 44.8% and 50%, respectively.

Nonetheless, Lululemon’s contractual margins further reduced its net profit by 25% year-on-year to $ 259.1 million in the first nine months of 2020. Analysts expect its profits to fall 8% for the whole year.

But next year, analysts expect its profits to jump 48% as headwinds from the pandemic ease and revenue growth picks up again. Investors should still be skeptical of analysts’ long-term forecasts, but this rate of growth suggests that the stock is not too expensive at 50 times forward earnings.

The key to take away

Lululemon’s resilience throughout the retail apocalypse and the COVID-19 pandemic, which has forced many retailers to file for bankruptcy, indicates that it is still a “blue chip” player in a crowded industry. As long as he continues to expand his digital and physical presence, remains focused on his “power of three” goals, and maintains his brand’s appeal, his stock should be worth the risk, even if it is trading at a premium to. other clothing retailers.

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 heterogeneous! 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.

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