Tuesday, April 7, 2020

An AIM International Equity holding: Lululemon Athletica (LULU, $181.25): “LULU is Here to (Nama)Ste” by Molly O’Neill, AIM student at Marquette University

Lululemon Athletica (LULU, $181.25): “LULU is Here to (Nama)Ste”
By: Molly O’Neill, 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) is a market leader that operates in Canada, United Sates, Asia Pacific, and internationally. LULU designs, manufactures, and distributes retail of athletic apparel and accessories.
• LULU operates in two business segments: Company-operated stores (491 stores) which makes up 83% of sales and Direct-to-Consumer which makes up 8.1% of sales.
• Lululemon reached its goal of $4 billion in revenue, which is a 20% increase from FY2018.
• Lululemon’s strong brand presence, has opened the door for new market opportunity in the fitness class space.  
• LULU’s stock price has dropped 7.01% over the past 52 weeks, due to the Coronavirus Pandemic.

Key points:
Lululemon Athletica continues to beat analysts’ expectations. FY2019 LULU’s fourth quarter revenue was up 20% to $1.4 billion and full year revenue of $4 billion. Moreover, Diluted EPS was $2.28 in the fourth quarter, compared to FY2018 of $1.85 EPS. In 2018, LULU initiated the “Power of Three Growth Strategy.” The 5-year plan is to double the size of its men’s revenues, double its digital revenues, and quadruple its international revenues. Management has expressed they are on track to meet their goals by 2023.

Since March 16th, all Lululemon stores have been closed in Europe and North America. Although, LULU’s digital business has remained strong through Q4 and the pandemic. LULU does not have accurate 2020 guidance, because the of the unknown nature of COVID-19. All the LULU stores in China are open today, with the expectation of the Wuhan location. LULU is seeing sales pick up dramatically, from China, and expects to see the same results from currently closed stores.

Lululemon remains in healthy condition, faced in the environment today because of their liquidity position. LULU currently holds over $1 billion in cash on their balance sheets and has no long-term debt. Likewise, they have a $400 revolver credit facility with 3-years to maturity left. Similarly, LULU is driving their e-commerce channels during the pandemic. For example, the firm is redeploying their money that would be used for store events into digital marketing, to drive e-commerce performance.

What has the stock done lately?
Lululemon stock was trading at a record of $264.44 on Feb. 20, 2020. Since Lululemon announced the closure of stores in Europe and North America the stock has dropped 2.29%. Today, Lululemon is trading at $181.25, still beating the S&P500.

Past Year Performance:
Over the past 52 weeks, LULU has had returns of 20% and a price change of 7.01%. This February, LULU was at its high at $264.44. March 13th, LULU hit its 52-week low at $134.24. Following the dip in July 2019, LULU has been fluctuating around $200.00.

 Source: FactSet

My Takeaway
LULU as added to the international AIM fund in April 2016 at a price of $65.48, with an initial price target of $76.63. Since Lululemon was pitched, LULU’s price has tripled. Lululemon has opened up 491 stores from Canada to Asia. With a strong 5-year plan in place and an emphasis on growth, LULU has positioned themselves as a strong competitor. 

I believe Lululemon’s plan during the pandemic, to redeploy their spending into their digital outlets, will help generate strong earnings. Even though the stock has not been performing its best, I believe LULU is still valuable to the international AIM fund. LULU has the potential for future growth that outweighs negative effects the COVID-19 pandemic presents.

 Source: FactSet