Tuesday, December 1, 2020

An International Equity holding: Lululemon Athletica Inc (LULU, $345.74): “When Life Gives You Lemon, Make Lemonade” by: Justin Nguyen, AIM Student at Marquette University

Lululemon Athletica Inc (LULU, $345.74): “When Life Gives You Lemon, Make Lemonade”

By: Justin Nguyen, 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 in the designing, manufacturing, and distributing athletic wear and accessories for men and women. The company is headquartered in Vancouver, Canada and has big international presence in the United States, Mainland China, Japan, and others. 

• LULU operates through two business segments: company-operated stores with 506 stores (63% of FY19 Revenue) and direct to consumers (29%).

• While COVID-19 significantly hurts the company’s operated stores, a very positive path emerged as LULU’s e-commerce saw the incredible rise.

• Meghan Frank was appointed as the LULU’s chief financial officer (CFO) in November 20th, 2020, after being with the company for four years. 

• LULU could be back on its trend of crushing analysts’ expectations as positive news for COVID-19 vaccines were released.

Key points: 

Lululemon Athletica’s performance has dropped since the beginning of FY 2020 due to the COVID-19 pandemic as the company has to close its stores in Mainland China, North America, and other regions. For that reason, LULU’s company-operated stores revenue dropped significantly from $583.8 million in Q2 FY19 to just $287.2 million this Q2. This is the main driver for the drop in the company’s value during the February – March period as this sector represents over 60% of total revenue. Recovery has been positive for LULU, fortunately, as it has been able to reopen 492 out of 506 stores as of August 2nd

In November 21st, Lululemon named Meghan Frank as its chief financial officer. Ms. Frank has been with the company since 2016 and has been involved in the retail industry for over 20 years. The company’s first female CFO actually has been very active in helping the company combating COVID-19 and is expected to help LULU secure its financial position during this fluctuating time. The political changes in the United States, where Lululemon generates over 70% of its total revenue, will have to be carefully considered. 

As bad as the effect of the pandemic may have seemed, the company was able to utilize it to find  new lights in its e-commerce operations as it saw an incredible 155% increase in revenue, rising from $217.6 million to $554.3 million for Q2 year-over-year. This figure now represents 61.4% of total revenue, replacing its company-operated stores segment to have the highest revenue contribution. While this may only be temporary, it creates a lot of positivity over LULU’s tremendous upside in its e-commerce. With its company-operated stores expected to go back on track as the development for vaccines has been positive, Lululemon’s performances would be very promising over the next couple years. 

What has the stock done lately?

Since the market recovered from the initial shock of the pandemic when LULU was trading at only around 136$/share, the company’s value has gone up roughly 150%. The company’s stock is now trading at $345 per share as its recovery beat that of the S&P 500 by a wide margin. 

Past Year Performance

Over the past 52 weeks, Lululemon’s value has gone up roughly 60% despite the drop in February and March. Since, it has been bullish until the company’s stock dropped 12% in September. This drop has more to do with the sell trend in the broader market at the time rather than a response to LULU’s financials as it still beat the analysts’ estimates. For the past three months, LULU has been on a steady climb. 

Source: FactSet

My Takeaway

Lululemon was added to the AIM International Fund in April 2016 at around $65 per share. The stock has now gone up roughly five times since, mostly due to the excellent strategy of creating and utilizing the culture of yoga pants. As young people recognize the value of working out, Lululemon saw the opportunity to present its athletic wear with the best quality to deliver unique  comfort to the consumers. The company’s products has even gone beyond the purpose of working out as it is very common to see its products, especially yoga pants, to be worn by many as casual clothes. As Gen Z is expected to follow the trend in addition to its thriving e-commerce, Lululemon is still in a very solid position to grow. The bad part of the year seems to have passed, and Lulu was able to make its lemonade. The sugar is expected to be added in the near future, and thus the AIM International fund should be patient and the sweetness would come. 

Source: FactSet