During the pandemic, when homes took over office spaces and comfort clothing replaced denims and trousers, sports apparel and athleisure company Lululemon Athletica (LULU) made big strides in the U.S. retail sector. The stock has shown exponential growth, having jumped 658.8% in the last five years and 126.8% in the past three years. In addition to this, Lululemon added 27.6% in value in the last 12 months, outperforming the broader market index returns, while its peer Nike (NKE) remained flat with 0.75% gains and Under Armour (UAA) lost about 23.7%.
Exhibit 1: 1-year price returns of Lululemon, Nasdaq Composite, Nike and Under Armour
Source: Yahoo Finance, Data as of 4th April 2022 close
Repeats history with another quarter of market-beating results
Lululemon is a company that is known for consistently delivering market-beating results. In its fourth quarter, the company made $2.13 billion in revenue, 23% more than a year ago. Net profits totalled at $436 million or $3.37 per share, beating market estimates of $3.28 per share.
Exhibit 2: Lululemon Reported Sales vs Estimated Sales
These strong numbers came in after the company management, earlier this year in January, had warned investors of the supply chain issues eating into Lululemon’s holiday quarter performance. Due to the fast-spreading Omicron-variant of COVID-19, the company had to operate stores at reduced hours with lesser staff. However, the results came in as a relief to investors as Lululemon shares rallied nearly 10% in its post-earnings session.
Overall, for the full year of 2021, the company surpassed the $6 billion annual revenue mark for the first time. Compared to pre-pandemic levels, Lululemon’s revenue rose by $2.3 billion, at a two-year compounded annual growth rate of 25%.
Upbeat outlook with price hike in store for 2022
Lululemon Chief Executive Officer Calvin McDonald said that the company will take “modest selective” price increases to offset some of the cost pressure. These price hikes, according to McDonald’s, will affect only a very small portion of their styles.
Lululemon being a premium athleisure brand should have no issues pushing through the higher prices, as it is already known for expensive clothing. Barclays’ Managing Director and Consumer Discretionary Analyst, Adrienne Yih, notes that the company selling leggings in the range of $118-$128 has extreme pricing power as they expanded their active customer base during the pandemic. As per her, Lululemon is a confidence builder and not just an apparel wear, and that is what drives its popular demand.
In 2022, Lululemon aims to open a net of 70 company-operated stores compared to 53 net new stores opened last year. It finished 2021 with 574 stores.
Lululemon beats rivals in sports apparel category
It may seem next to impossible for a women’s legging maker founded in 1998 to take over well-established international brands. However, Lululemon just accomplished the impossible by virtue of its branding prowess. For every $1 sale made in 2021, the company churned the highest operating profit ($0.19) among its competitors- Nike ($0.19), Adidas ($0.09) and Under Armour ($0.09).
Exhibit 3: Cost and Profit break-up of Lululemon and its key competitors
Lululemon has successfully branded itself as a classy and fashionable sportswear company, adding different colours to the conventional monotone shades offered by Nike and others. Even though the Nike product range comes at a more affordable price with no compromise in quality, people choose to shell out more on a Lululemon for a trendsetting look.
Lululemon joins the running shoes race
Lululemon takes competition with rivals to a whole new level as it enters the running shoe business. It launched its first women’s running shoe, Blissfeel, in March 2022 at $148. The shoe is up on sale in North America, the United Kingdom and China. Later in the year, the company plans to add three more designs – Chargefeel, Restfeel and Strongfeel, while introducing men’s shoes in 2023.
Taking on footwear giants like Nike and Adidas is no joke. The footwear industry is more capital-intensive than apparel manufacturing as it requires a highly technical and complex manufacturing setup. In its most recent quarter ended February 28, 2022, Nike made about 65% of its sales from footwear alone whereas Lululemon has just started off. But it also indicates a big shoe-business market that Lululemon can take advantage of.
One major difference is that just like its clothing range, Lululemon entered the footwear market with women’s shoes first. This is a breakaway from the industry tradition of designing men’s shoes first and then adapting women’s shoes from there. Chief Product Officer Sun Choe said that this was an intentional move as they saw an opportunity to solve.
Lululemon has overcome stiff competition in the past and can rework its magic to win this battle too. It aims right at fulfilling the market gap with its women-focused offerings. If it is successful in biting into the sports-shoe business, the growth potential for this stock looks very bright.
Analyst recommendations
Post its stellar results and a robust outlook, several brokerages revised their price target and rating for the sports apparel company. Lululemon Athletica was valued at $384.18 per share as of last close on 4th April, 2022.
