Sunday, May 6, 2018

A current AIM International Fund Holding: Lululemon Athletica, Inc. (LULU) by Stephen Lane. "Breathing Easy"

Lululemon Athletica, Inc. (LULU, $81.40): “Breathing Easy”

By: Stephen Lane, AIM student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Lululemon Athletica, Inc. (NDAQ:LULU) is a designer, distributor, promoter and retailer of athletic and activewear apparel. They main consumers are women in the US, Canada and Australia. The company currently has two brands Lululemon and Ivivva and, has a total of 406 stores.   

• LULU saw positive operating income growth for the first time in three years all thanks to their long-term strategies.  Management is targeting just over a 20% operating margin and a 50% gross margin.

• The Athletic and Activewear market has seen a steady increase and while the marketplace becomes more diluted, LULU has been able to take a leading position with differentiating products and store experience.

• Management is looking to expand into more men’s clothing. They claim that there is potential for $1 billion of sales from men’s, twice as much as today.

• LULU has been performing well in a very difficult industry and is expected to continue to succeed in the future with strong market positioning and prime growth opportunities.

Key points: LULU’s management continues to be optimistic. They have achieved a premium position in a growing market. The market is expected to reach $231.7 billion by 2024. This growth is driven by the increase in overall knowledge of health and the growing portion of the population that is concerned about living a healthier life style. LULU can remain a leader because of their strong product assortment, online presence and unique in-store experience.

The company has successfully differentiated their product assortment by providing consumers cross-functional apparel that is at the cutting edge of fashion while incorporating the newest technology. They have achieved a wide consumer base and provide a high-quality product at affordable prices. When it comes to their online presence, since they released their application a year ago they have seen a strong growth of online sales. LULU’s online content gives consumers better visuals, videos and descriptions of their products. In-store they provide their customers a very educational experience allowing them to learn about the benefits of each product, encouraging trials and repeated visits.

As observed above, LULU is well established in North America and Australia: however, they plan on expanding overseas. There is a large amount of opportunities internationally and analysts have stated that there is potential for 300+ locations up from the 70 in 2017. In addition to international expansion, LULU has growth opportunities for men’s. The market for men is extremely diluted currently with players like Nike, Adidas and Under Armour. That being said, management is expecting to double sales from men’s by providing more marketing dollars toward their male brands and allowing for more men’s space in stores.

Management has made a great effort to improve their margins by lowering expenses. They expect gross margin to be around 50% and operating margin to be around 20%. Management has successfully revitalized the company and shows great promise moving forward.

What has the stock done lately?

LULU’s management took very conservative outlook on 2017 and beat their earnings each quarter. In addition, it is expected that their last quarter was far better than previous years. Because of this, they are expected to beat earnings and have seen a quick rise in their share price as a result. Several firms have also upgraded LULU to a buy and outperform.

Past Year Performance:

LULU has increased over 60% in value over the past year. The stock recently hit its 52-week high of $83.98 and remains close to it. The stock has been volatile ranging from $47.26-$83.98 with a volume of 1,685,998. The company is close to breaking their 5-year rut and remain a strong element of the AIM International Equity Fund.

My Takeaway

LULU can finally take a deep breath after successfully climbing their way back from hard times. They have achieved the 52-week high recently and only look like they will continue to be a strong component of our AIM International Equity Fund. With a differentiated product assortment, unique online and in-store experience, overseas and men’s growth opportunities and strong improved margins, LULU has positioned themselves very well moving forward. Because of these factors Lululemon Athletica, Inc. remains a solid buy and is an important share in our AIM International Equity Fund.