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Robert Stephens, CFA
Robert Stephens, CFA
Articles (217) 

Why Lululemon Can Beat the S&P 500

An improving strategy could serve as a catalyst

July 22, 2019 | About:

Lululemon Athletica (NASDAQ:LULU)’s continued expansion into international markets could spur financial growth. The athletic apparel retailer plans to open new stores in China, as well as across Europe, while also investing in its global online capabilities. The company’s increasing focus on product and store innovation could also enhance its appeal to a wider variety of consumers, while plans to become more efficient may provide a financial boost.

Even though the stock has risen 52% in the last year versus a gain of 5% for the S&P 500, further outperformance could be ahead.

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Growth catalysts

Lululemon's investment in international growth opportunities includes increasing its digital capabilities in China through the relaunch of its local website. It also plans to open 10 to 15 stores in China this year following a 70% rise in the country's market growth during the first quarter.

It plans to open an additional five to 10 stores in Europe, and continue to invest in websites focused on Japan and Korea that they launched last quarter. International growth is expected to represent an increasing portion of the company’s growth, which could reduce risk through diversification across multiple geographies.

In addition, Lululemon is in the process of expanding its global online-only size and color offerings for men and women. In the most recent quarter, it expanded its "buy online, pickup in store" (BOPUS) capability to 150 stores from 35 stores. It expects to offer BOPUS across all its stores later in the fiscal year, and enhance the speed of availability once products have been ordered. In the most recent quarter, 80% of online orders were ready for collection within one hour.

Improved customer offering

Lululemon’s focus on improving the customer experience could differentiate it from peers. For example, this month it opened an experiential store in Chicago that offers a meditation space, healthy food and areas for community gatherings. It is using experiential stores alongside a membership program pilot that it recently expanded. This could further strengthen customer loyalty and widen the company’s economic moat.

The company has been releasing increasingly innovative products to expand into new categories of revenue. This includes self-care, which the company rolled out last month across 50 stores, as well as additional styles of existing products across its technical apparel segment.

Risks

The company expects tariffs on imports from China to reduce its gross margin by 20 to 25 basis points for fiscal 2019. And it believes costs will rise further as it increases airfreight usage. The company has been using air shipping more often to hedge against disruption in ocean shipping lanes as the key dates related to tariff increases approach. Hopefully, airfreight will ensure the timely delivery of products should additional tariffs be put in place.

In response to higher costs, Lululemon is seeking to become more efficient. For instance, it is segmenting its supply chain, and it opened a new distribution center in Toronto last quarter to reduce delivery times and costs across eastern Canada.

Although the company expects costs to rise due to additional tariffs, its sales in North America remain robust. In the most recent quarter, North American sales jumped 18%, with strong store traffic. Lululemon plans to open a further 15 to 20 stores in the U.S. and Canada in fiscal 2019, which could increase profitability.

Outlook

For fiscal 2019, Luluemon is forecast to increase earnings per share by 22%, followed by growth of 19% next year. This rate of growth helps to justify its price-earnings ratio of 49.

Even though the stock has outperformed the S&P 500 in the last year, it could deliver further capital growth.

Disclosure: The author has no position in any stocks mentioned.

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