Shares of lululemon athletica (NASDAQ:LULU) surged to new all-time highs after another monster earnings report at the end of August. Revenue climbed 25% year over year, fueled by strong comparable-store sales of 10% and online sales growth of 48%. This is a massive acceleration over the year-ago quarter's performance of 13% growth in sales.
Lululemon's recent performance is very impressive considering the increasing number of competitors entering the athletic wear market. In addition to Nike, Under Armour, and adidas AG, there's been a wave of smaller entrants to the sports apparel market in recent years, not to mention the expansion of athletic wear assortments from traditional apparel stores, such as Gap's Athleta brand, Calvin Klein, and L Brands' Victoria Sports line at Victoria's Secret.
Despite this heightened competition, Lululemon keeps posting robust growth rates, which speaks volumes about the brands' strength in the marketplace. Let's review what sets the brand apart from its peers and how it can sustain this momentum going forward.
How Lululemon wins over customers
On the company's second-quarter conference call, new Lululemon CEO Calvin McDonald noted the product differentiation he's experienced as both a longtime customer and now as the leader of the yoga-inspired retailer:
The product at Lululemon is exceptional. I've been an avid guest for years and a fan of the product. I believe the quality, fabric, fit, and technical innovation stand far above our competitors.
As a customer myself, I share his enthusiasm. A key reason for the company's success is rooted in a deep devotion to quality that includes earnestly listening to customer feedback.
While big brands like Nike and Under Armour have grown their brands through marketing and signing star athletes, Lululemon has made a name for itself by relying heavily on word of mouth.
Lululemon regularly hosts yoga classes in its stores and organizes running events, which give the company a perfect opportunity to hear from customers as they are using the product during a workout. For example, its popular Nulu fabric was the result of customers saying that they wanted to wear a fabric that had a barely there feel.
Athleisure is displacing normal apparel
While several retailers have filed bankruptcy or shut down stores in recent years, the athletic apparel market has consistently grown, turning "athleisure" into the hottest buzzword in fashion. The term grew out of people discovering the comfort of wearing workout gear as everyday attire. Instead of proving to be a fad, athleisure is now extending to formal styles suitable for the office.
Recently, Lululemon launched its new Office Travel Commute assortment, featuring trench coats, button-down shirts, and pants that look like styles one would find at a regular, non-athletic apparel store. On its most recent confernce call, Lululemon's management noted that customers were responding well to the new styles.
Success in office styles could have a huge impact on Lululemon's growth. It brings together the best of both worlds: comfort and fashion. Athletic wear is designed for movement and activity (and sweat). These concepts are now being applied to broader apparel categories, while featuring the same synthetic fabrics, comfort, and functionality as the best athletic wear.
Specifically, this could do wonders for attracting men to the brand, an area where Lululemon is already gaining traction, having reported a 30% comparable sales growth rate in the second quarter in the men's category.
Lululemon is nowhere close to its potential
There are other trends impacting Lululemon's growth, including more boys and girls participating in high school sports and a more heightened awareness among consumers for a healthy lifestyle overall.
Asia is a market to watch going forward. Lululemon has 24 stores open in Asia, with plans to open 15 to 20 more stores this year. Asian customers are responding extremely well to the brand, with comparable sales growth lately around 50% year over year. One factor driving growth in Asia is the Chinese government enacting a policy designed to encourage its citizens to be more active and participate in sports.
At a forward P/E of 37, Lululemon shares are not for the faint of heart. But compared to Nike, the stock doesn't look that expensive. Lululemon's PEG ratio is 2.02, which is lower than Nike's 2.48.
With Lululemon's international potential and opportunity to greater expand sales to men, the brand still has a lot of customers to reach and new markets to enter. For these reasons, Lululemon could have a lot more room to run over the long term.