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Robert Stephens, CFA
Robert Stephens, CFA
Articles (230) 

Why Lululemon Athletica’s 92% Stock Price Rise Could Continue

The company’s strategy may boost its financial performance

January 22, 2019 | About:

The release of innovative products could catalyze the financial prospects of Lululemon Athletica (NASDAQ:LULU). The company is seeking to develop additional partnerships with online style destinations. It is also set to expand its outerwear collection.

An improved customer experience that includes greater omnichannel capabilities could boost the company’s competitive advantage. Further investment in its digital capacity is leading to improved engagement, conversions and sales. International expansion could diversify the business, while offering relatively high growth rates.

Although the introduction of a subscription program may not have a positive impact on margins, the overall profit trend remains positive. Having risen 92% in the last year versus a 7% fall for the S&P 500, the stock could have investment potential.

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Innovation

An increasing focus on innovation could boost Lululemon Athletica’s stock price performance. It had opened 43 "seasonal stores" by the end of the third quarter, and is expected to open a further six stores in the fourth quarter. They increase convenience for existing guests, and also attract a large number of new customers. The company estimates that 40% of guests in "seasonal stores" are new to the brand. The launch of its "buy online, pickup in store" program leverages its store network. It is now live in 35 stores across four markets, and provides greater flexibility for customers.

Product innovation has included the launch of an exclusive capsule with MR PORTER, which is a leading online men’s style destination. The partnership has been well received by customers, with further partnerships expected in future. Expansion into the outerwear segment is still in its early stages. In the most recent quarter the company offered a wider range of puffer and water resistant styles which contributed to comparative outerwear sales growth of 150% in men’s and 40% in women’s. Further innovation in outerwear is expected to catalyze men’s sales so that they reach $1 billion in the 2020 fiscal year.

Strategy

The company continues to execute its strategy of building its presence in markets outside of North America. In China, the company estimates that there are over 400 million millennials who are digitally engaged and who are seeking premium health and fitness brands. It is also seeking to connect with customers in Europe, where it is using local studios and teachers to capitalize on the growing interest in health and fitness among consumers. This strategy led to total market growth of 50% in Europe and China in the third quarter.

Digital sales growth is being catalyzed by Lululemon Athletica’s improving online capabilities. It is increasing traffic and conversion rates, with guest acquisition rising 41% in the most recent quarter. The company’s email list grew 90% last quarter, while traffic to the site increased 35%. Improvements are being made to website functionality, with faster checkout, personalized versions of the website and an automated browsing experience leading to positive customer feedback.

Risks

The company offers a subscription-based model that allows members to receive exclusive products, attendance at curated events and free expedited shipping in return for an annual fee. This is an uncommon approach among clothing retailers, which may lead to diluted margins as customers switch from buying full-priced items to less expensive subscription options. It may also cause rivals to launch their own subscription plans that offer a wider range of benefits.

So far, though, the introduction of a subscription plan has been met with positive feedback by customers in the limited markets in which it is available. The company is on target to report an annualized rise in product margin of 700 basis points for the period 2015 to 2018. It is making further investments across its distribution network that are expected to lead to further gains in product margin over the next couple of years. It is well ahead of its 2020 margin targets, with a successful track record of full-price selling expected to continue.

Outlook

Increasing product innovation could boost Lululemon Athletica’s financial outlook. It is seeking further partnership deals, while maximizing its growth potential in outerwear products. Services such as buy online and pickup in store could enhance its omnichannel capabilities and improve the customer experience.

Investment in its international operations may allow the business to capitalize on growing demand for its products in Europe and China. Greater website functionality and personalization could lead to increasing traffic and conversion.

Although the introduction of a subscription-based model may hurt margins, the company’s investment in its supply chain could more than offset this. Having outperformed the S&P 500 in the last year, the stock could have investment appeal.


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