On Thursday, crude oil prices dipped below $60 per barrel for the first time in more than five years. It's no surprise, then, to see downward pressure on shares of closely related businesses in the energy sector. But it's also easy to forget cheap oil isn't bad for everyone.
Take yoga apparel specialist lululemon athletica (LULU 1.57%), shares of which are up around 14% so far this week on the heels of both its solid third-quarter earnings and a notable upgrade from Wells Fargo analyst Paul Lejuez. Lejuez described lululemon as "one of the nicer houses in a great neighborhood," and "one of the most attractive growth stories in retail [...], helped by the tailwind in athletic apparel."
But then he added this curious note: "[I]mportantly, lower oil prices may become a tailwind in 2015, as much of LULU's product is oil-based."
How does cheap oil specifically apply to lululemon?
Many of lululemon's products are made using the company's trademarked Luon fabric. For perspective on just how pervasive Luon is, note that when lululemon recalled its black Luon bottoms early last year due to supply chain quality issues, it revealed that that product alone represented around 17% of all bottoms in its stores -- and that's not to mention the hosts of Luon-centric merchandise it offers including other bottoms, tanks, tops, and jackets.
While Luon comes in several knit varieties depending on the product, it's generally comprised of 84% Nylon and 16% Lycra -- both of which, at their bases, are derived from crude oil. Consequently, cheap crude oil should ultimately translate to reduced materials expenses for lululemon and, in turn, lower costs of goods sold, and a higher gross profit. At the very least, it should serve to partially offset the significant investments lululemon continues to make since last year's recall to improve its supply chain.
Of course, those lower oil prices still need time to work through the supply chain to translate to lululemon's bottom line. But in the meantime, the aforementioned tailwind in the athletic apparel industry is clear, as players like lululemon, Under Armour, and Nike ride the momentum from each of their respective impressive quarterly reports:
Looking ahead
Back in March, lululemon CEO Laurent Potdevin described 2014 as "an investment year with an emphasis on strengthening our foundation, reigniting our product engine, and accelerating sustainable and controlled global expansion." And wouldn't you know it, after weathering a few painful hiccups along the way, lululemon has effectively done just that by closing out calendar year 2014 with two consecutive quarterly earnings beats.
Opportunistic investors have already reaped significant rewards as lululemon rights its ship and makes steady progress toward those long-term goals. But if oil prices continue to remain depressed in the coming quarters, it seems safe to say it will only add fuel to lululemon's fire.
