I already own shares of Lululemon Athletica (LULU 0.77%). However, I recently added to my position after the stock suffered one of its worst double-digit sell-offs since the 2013 see-through pants debacle. The yoga-apparel-chain's stock took a 12% hit earlier this month after the company posted weak profit for the third quarter, and lowered its expectations for the full year.
I believe the market's reaction to this news was overblown. Moreover, with the stock down nearly 30% in the past six months, I think this creates a buying opportunity for patient investors with a three-to-five year time horizon. This will give the retailer time to execute its global growth plan, and see investments in newer product categories, such as menswear, come to fruition.
Below, I've outlined three reasons why Lululemon stock is a buy heading into the new year.
1. Men's business
Lululemon is no longer a women's-only brand. Once synonymous with all that was feminine, the athletic brand now has a fast-growing men's business under its belt. The company first officially entered the men's athletic gear market in 2013, and is now on pace to open its first stand-alone men's stores in the U.S. early next year. Lululemon already has a few fully dedicated menswear stores open in Canada, which seem to be gaining traction with the local communities there.
The retailer has done a remarkable job shedding its girly image during the last two years. This despite various supply-chain issues that somewhat damaged the brand's reputation for quality workout attire. Lululemon's ability to rebound from those problems speaks to the underlying strength of the brand and its loyal customer base.
Today, Lululemon's men's business is actually growing at a faster pace than its overall business, boasting same-store sales growth of 24% in the latest quarter. As of October, both the men's and women's businesses will be overseen by Lululemon's first-ever creative director, Lee Holman. This should further streamline the creative process, and thereby help the retailer get new products to consumers faster than ever before. Moreover, Lululemon's management is confident that its menswear segment will become a billion-dollar business for the company in the years ahead.
2. Growth in online and international channels
Lulu's e-commerce business is starting to show signs of life, as well, and it could prove a lucrative revenue stream for the retailer in the quarters ahead. Direct-to-consumer comps were up 21% in the latest quarter. Net revenue in Lulu's e-commerce channel increased 16%, to $89.3 million, in the period, which was more than the 14% spike in revenue overall for the quarter. That impressive uptick in online sales is further compounded by the fact that online merchandise typically boasts fatter margins.
Online sales now make up 18.6% of Lululemon's total revenue. While this is impressive, it means there is still plenty of room for growth going forward. Rival athletic brand, Under Armour (UAA 0.92%), for example, generates more than 26% of total net revenues from its direct-to-consumer business. Therefore, Lulu has some catching up to do in online sales growth. Additionally, shares of Under Armour have handsomely outperformed those of Lululemon so far this year, with Under Armour stock up nearly 20% year to date compared to a 10% decline in shares of Lululemon.
However, all signs point to strength in the e-commerce space for niche-retailer Lulu; therefore patient investors could be rewarded down the road as this becomes a more-significant portion of the business. On top of this, Lululemon is also growing its physical footprint with new store openings both domestically and abroad.
Lululemon has opened 65 new storefronts in the past year. The retailer opened 18 new stores in the third quarter alone. The bulk of Lululemon's 354 company-owned stores are currently in the United States. However, management is carefully expanding into key markets outside of the U.S. today including Asia and Europe.
The retail chain boasts a unique retail strategy in which it first opens "showrooms" in new markets to gauge consumer interest in local communities. The company later transforms these showrooms into full-blown Lululemon stores. As of the third quarter, Lulu had a total of 86 so-called showrooms in operation -- 27 of these were located in North America, followed by 19 internationally, and 40 ivivva showrooms.
Ivivva is Lululemon's stand-alone concept for girls and teens fitness and dance apparel, which is another potential revenue-growth channel for the retailer that is still in the early stages of its life cycle.
3. Margin improvement
Lululemon now has a solid plan in place for reinvigorating its product margins. For starters, management is in the process of optimizing the company's global supply chain. This includes Lululemon's decision to switch more shipments from air freight to sea, which will help lower costs. This reduction in air transport, together with improved logistics and duty costs, should help fuel a comeback in Lululemon's margins in the quarters ahead.
"These programs are all part of the evolution to a more sophisticated, scalable supply chain that can flow product more efficiently and consistently based on anticipated product life cycles," according to Stuart Haselden, Lululemon's chief financial officer.
These are clear opportunities that the retailer has identified, and is in the process of exploiting. Over the long haul, these initiatives should help reduce overhead costs and improve margins in a meaningful way.
The underdog
The bottom line for investors is that Lululemon is making the necessary moves to boost shareholder returns, and improve its overall operations. With Laurent Potdevin and a handful of fresh faces on the executive team now, the retailer has the strongest leadership squad we've seen from the company in years. I think this creates a compelling reason for long-term investors to own Lululemon today, despite the recent sell-off in the stock.
