Despite being one of the most hated stocks on Wall Street, Lululemon (LULU, Financial) ended 2015 in the green and is off to a great start in 2016. The stock is up 8.8% year to date, which is remarkable given the recent market correction.
The company is making strong progress in the international market and is also improving its online business. These factors could act as long-term tailwinds for the company.
Progress in the international and online segments
The company’s ecommerce segment is starting to show positive signs and, in the approaching quarters, could prove a strong revenue source for Lululemon. In its latest quarter, direct-to-customer comparable sales surged 21%. Lululemon’s ecommerce segment net revenue surged 16% to $89.3 million and accounts for more than 14% of the company’s overall revenue. This striking surge in the ecommerce segment is synthesized by the fact that online products usually claim greater margins.
Online sales account for 18.6% of the company’s net revenue. This clearly indicates that there is plenty of room available for growth moving forward. Although Lululemon does not hold a robust position in the market in terms of direct-to-customer service as Under Armour (UA, Financial), the company is slowly growing its presence.
Under Armour makes more than 26% of overall revenue from its direct-to-customer business. For that reason, the company has to improve many things to continue its online sales growth. Moreover, shares of Under Armour have substantially performed better than Lululemon’s this year, as Under Armour stock is up approximately 19% year to date.
The company is also expanding its physical presence by opening new stores domestically as well as internationally.
Room for expansion
Sports is the most robust section in the apparel business, specifically when it comes to benefiting from dominant brands and the latest designs. Every company mainly focuses on designing its products based on a trend called athleisure, through which customers can use the company’s products for everyday use as well as sports activities.
Lululemon’s rivals like Nike (NKE, Financial) and Under Armour are gaining gigantic rewards from the athleisure segment; if Lululemon continues to move on the same track as that of Nike and Under Armour, it will produce robust results.
In terms of market value, Lululemon's size is equal to 7% of Nike's size and less than half the size of Under Armour, as it has market capitalization of around $7.6 billion. In terms of revenue, Lululemon accounts for only 6% the size of Nike and 28% the size of Under Armour.
If the company’s management carries on moving in the right direction, then the company’s business can continue growing.
Although Lululemon’s prospects look good, the stock is too expensive to buy right now, and investors should wait for a better entry point. Lululemon is currently trading at 30x trailing earnings. Clearly, investors have priced a lot of Lululemon’s future growth into its share price, and the stock can underperform if the company’s growth slows down. While Lululemon’s business is improving, investors should avoid the stock for now.
