Thursday, December 13, 2018

A Current AIM Program International Equity Holding: Lululemon Athletica Inc. (LULU) by: Mary Kate Simon. "Lulu is Anything but a Lemon"

Lululemon Athletica Inc. (LULU, $133.62): “Lulu is Anything but a Lemon”
By: Mary Kate Simon, 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. (NASDAQ:LULU) designs and provides athletic apparel and accessories with a focus on clothing for yoga or other “sweaty endeavors” for their company-operated stores and directly to their individual customers in the United States, Canada, and internationally.

• As millennials continue to grow older, their demand for LULU products continues to grow with them.

• “Athleisure” is a major movement where athletic clothes take steps outside the walls of the gym and are worn as everyday clothes for both men and women.

• Management reaffirmed its guidance to achieve $4 billion in revenue by the year 2020.

• Lulu posted a 97% YOY EPS growth and has a 25% underlying sales growth.

Key points:

Lululemon Athletica continues to grow and increase their market share. Although some of their major competitors, such as Nike and Adidas, take up a much higher share, LULU is well positioned in the industry as a differentiated “sweaty pursuits” company. In the past, LULU has been highly focused on selling to younger women. However, LULU continues to break barriers in whom they sell to. There continues to be a heavy increase in men’s sales, increasing 80% in the last few years.

Recently, LULU has accumulated a new CEO—Calvin McDonald. McDonald is a growth-oriented leader with a track record that proves this time and time again. His goal is to continue to integrate the LULU brand with customers by giving them what they want: great quality clothes and easy access to buy them. A strong consumer mindset, a performance-driven approach and success in developing people, McDonald has helped LULU grow into a stronger brand, with both guest loyalty and passionate employees.

Including both e-commerce and store expansion, LULU continues to expand internationally with a 47% YOY growth in revenue outside the US. Their international expansion doubled with their growth digitally, LULU continues to break into new markets. Their digital ecosystem is getting numbers never seen from the company. Direct to customer revenue grew 48% YOY compared to their 18% growth in stores.

Product innovation plays a major role in LULU’s growth. In their Q2 earnings call, there were notes about how men’s and women’s pants posted comps a little over 30%, while women’s tops were increasing in the double digits. Customers are responding well to the new On the Fly product line that bring “athleisure” to another level. This office travel collection gains customers from Gen X and Baby Boomers. Their expansion out of only Yoga clothing will help diversify LULU’s product offerings. This will continue to help build LULU into a lifestyle brand with deeper customer relationships.

What has the stock done lately?

Lululemon boasts a Relative Strength rating of 98 and a Composite rating of 99—the highest possible rating for a stock. They are releasing their third quarter earnings report on Thursday, December 6th. This stock has more than doubled in 2018, given a 52wk high of 164.79 and a low of 65.30. This low occurred at the beginning of the year and has continued to grow throughout the year.

Past Year Performance:

Over the first half of 2018, LULU has outperformed the market substantially, gaining 59% compared to a 2% increase in the S&P 500. This rally painted a nice picture for LULU as they were one of the top retail stocks this year. Lululemon gave their shareholders plenty of reasons to send the stock higher and higher. Sales have blown through managements aggressive targets in the last two quarters, including a 47% YOY revenue growth.

Source: FactSet

My Takeaway:

Lululemon Athletica Inc. has had a year of expansion and growth. The company continues to break through managements goals and outperform the retail industry. With LULU’s highly reputable brand equity, they strive to set goals for the stock price over $180. People are concerned that the price may be currently overvalued; however, this growth company expanding internationally, increasing in store purchases and highly surpassing digital sales is not finished yet.

Source: FactSet