Lululemon: After Underperforming Throughout 2021, Is This Growth Stock Ready To Bounce Back?
Lululemon Athletica Inc. (LULU) has been one of the major winners of the COVID-19 pandemic period. Heading into a global pandemic, you might have thought that healthcare plays which were fighting the disease, or a consumer staples pick which sold disinfectants, or simply a tech company with secular growth (which would have been relatively unaffected by the pandemic period) would have been the best investments to make, right? Well, as it turns out, the maker of world famous athletic apparel maker has been a top performer because of the social distancing trend that forced people to stay in their homes and removed the need to wear pants with buttons. In hindsight, this trend seems so obvious right? But, it required second-level thinking to capitalize on the eventual trends in March of 2020.
If investors bought LULU shares towards the trough of the sell-off last March, they’d be sitting on triple digit gains right now. However, now that the world is re-opening and the social trends are changing (people are being forced to dress up as they return to the office and begin to travel again). Therefore, sentiment surrounding LULU stock has changed as well. The S&P 500 is up roughly 11% year-to-date and LULU shares are negative, with a -0.13% performance through June 19th. And, with that relative underperformance in mind, we wanted to take a look at what the analysts that the Nobias algorithm tracks have had to say about the stock lately in an attempt to spot potential value in the market.
Neil Patel, a Nobias 4-star ranked analyst, recently wrote a bullish piece on Lululemon, making a favorable comparison between this athletics name to its rival Nike (NKE). Patel wrote, “Lululemon athletica reported first-quarter 2021 results Thursday after the market close, crushing Wall Street revenue and earnings expectations. But despite its strong numbers, the stock has significantly lagged its colossal foe in the industry, Nike (NKE), over the past 12 months.”
However, in spite of its underperformance, he listed 3 reasons why he believes that LULU has advantages over its larger peer in the short-term. First of all, Patel acknowledges the success that LULU has had in the eCommerce space. LULU’s online sales have thrived throughout the pandemic period (many of its retail locations were closed during the last year, so its ability to shift sales into the digital realm resulted in the major growth the company posted in 2020). Patel said that during its most recent quarter, “Lululemon's direct-to-consumer sales jumped 55% to $545.1 million.”
This means that the company's eCommerce segment represented 44% of its total revenue. This is actually down from the 55% of total revenue that digital sales represented a quarter ago; however, since then we’ve seen more physical locations open, resulting in more in-person transactions. Regardless, coming out of the pandemic Patel notes that Nike’s eCommerce sales recently exceeded 35% of its business.
Why is this important? Well, as Patel said, “as more transactions are done online, Lululemon benefits from higher margins. Overhead expenses (such as rent and payroll) of operating a physical store are avoided, meaning more money flows to Lululemon's bottom line.” This led directly to his next point: LULU has higher gross margins.
Last quarter, LULU generated gross margins of 57.1% which were well above Nike’s 45.6% gross margin figures. Patel says that not only does LULU have a superior direct-to-consumer business, but, “Furthermore, Lululemon rarely sells items at marked-down prices, which helps the company's premium brand perception.” He says that LULU is not forced to rely on other retailers, such as Dick’s Sporting Goods or Footlocker to sell its products (like Nike does), and therefore, LULU is better able to manage its inventory and run a more efficient operation.
Lastly, Patel believes that LULU can scale this efficient operation globally to take advantage of untapped markets. He says, “Nike is truly a global brand, as a substantial 66% of sales come from outside North America. This is in stark contrast to Lululemon's geographic split. As of Jan. 31, just 14% of the athleisure pioneer's business came from international markets.” LULU’s international growth came in at 125% last quarter, which, as Patel says, “Far outpacing the gain in North America.”
This trend isn’t expected to end anytime soon, which is one of the aspects of LULU’s business that bullish analysts are hanging their hats on. Demitri Kalogeropoulos, a Nobias 5-star ranked analyst, also recently published an article on The Motley Fool regarding Lululemon’s growth prospects. He touched upon the strong digital performance just like Patel; however, he also went on to highlight the strong forward looking guidance provided by the company’s management team at the beginning of 2021 and the company’s recent guidance update as well.
Regarding the original 2021 guidance, Kalogeropoulos said, “CEO Calvin McDonald and his team issued a bullish outlook for the quarter in late March, saying that revenue should jump to $1.1 billion compared to $652 million a year earlier.” Kalogeropoulos noted that much of this 69% growth is related to the weakness that LULU experienced during the March quarter a year ago during the worst of the COVID-19 pandemic. However, he was also quick to note that hitting management’s guidance figure “would still mark impressive growth over the $782 million first-quarter result the company achieved two years ago.”
The poor performance that LULU shares suffered throughout much of the months since providing that original 2021 guidance seemed to imply that the company could not hit management’s lofty growth targets. Yet, when LULU reported its most recent quarter, not only did the company exceed the market’s Q1 expectations, but management raised its full-year estimates as well.
During Q1, LULU posted $1.23 billion in sales, which was up 88.7% year-over-year (beating the $1.1b in guidance previously given by a wide margin). And, management is now calling for $5.825b-$5.905b in sales for the full year, which is also significantly higher than the prior $5.69b consensus that analysts had on Wall Street).
Coming into the Q1 results, Kalogeropoulos said, “I wouldn't bet against the retailer on this score. Instead, a few factors, like international sales, its seasonal store strategy, or hit new product introductions, might allow Lululemon to beat that aggressive growth outlook.” And, it turns out he was right on the mark with that opinion. So, looking ahead, taking his opinion into consideration seems to be a reasonable conclusion.
Regarding the rest of the year, Kalogeropoulos maintains his bullish outlook, saying, “Sure, the chain would be hurt by an industry slowdown if consumers decide to refocus spending in areas like travel and dining as the U.S. reopens. Yet that's no reason to avoid owning this attractive business today.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
John Ballard, another Nobias 5-star rated analyst, recently posted a Q1 breakdown on The Motley Fool as well, and in his piece, he touched upon another potential growth catalyst for LULU stock: the success that the brand is having with men. He wrote, “While women's products made up 69% of total revenue in fiscal 2020, management has been investing to expand the men's business as part of its long-term strategy. Men's growth underperformed during the pandemic, but this category is returning strong in 2021.”
Ballard notes that on a two-year compounded basis (taking into consideration both the pandemic period and the more normalized operating environment during 2019) LULU’s men’s sales have grown at a 27% clip, which exceeds the 23% growth rate that the company’s women’s segment has experienced.
As the company attempts to evolve from a more niche, yoga related brand into a more ubiquitous apparel brand, success with a broader array of customers is paramount. And, the strong growth in the men’s category points towards Lululemon’s brand strength increasing over time. Since the start of June, we’ve seen 18 blue chip analysts (those who’ve received 4 and 5-star ratings by the Nobias algorithm) post bullish commentary on LULU. These 18 “Buy” ratings compare favorably to the 2 “Neutral” ratings and just 1 “Sell” rating that we’ve seen blue chip analyst report over the same period.
In recent months, we’ve seen 4 blue chip analysts update their price targets for LULU shares. The average price target amongst these analysts is $401.50/share. Right now, LULU shares trade for $347.57. According to the 4 and 5-star analysts that we track, this implies that after the stock’s poor year-to-date performance thus far, Lululemon has upside potential of roughly 15.5%.
Disclosure: Nicholas Ward is long NKE. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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