Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

3 Reasons Why I Just Bought lululemon athletica Stock

By John Ballard - Dec 31, 2018 at 11:05AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The yoga-inspired retailer has a lot left in the tank.

Even though lululemon athletica ( LULU -2.79% ) has reported impressive results this year, it hasn't escaped the market's turbulence, with shares down 23% in the last three months. Wall Street is worried about a possible recession in the next few years, but I'm more concerned about where Lululemon is going to be in 10 years. I like the trends I'm seeing.

Lululemon has the right online strategy to win in tomorrow's retail landscape. Plus, I like that management still sees opportunities to expand margins over the next few years. The company is also winning over customers with everyday wear, which reveals an expanding market opportunity for the brand that goes beyond traditional workout wear. For these reasons, I decided to take advantage of the market's near-sightedness and start a small position in Lululemon stock.

Group of men and women standing against a white wall while holding yoga mats and wearing athletic apparel.

IMAGE SOURCE: GETTY IMAGES.

E-commerce growth is driving higher margins

While some retailers have struggled to figure out how to connect with customers in a digital age, Lululemon has its online strategy down pat. In the first three quarters of fiscal 2019 (which ends in January 2019), direct-to-consumer revenue has surged 51% year over year. This represents an acceleration over last year's pace, when direct-to-consumer revenue increased 27%. 

There are several reasons for the boost in the e-commerce segment. Other than robust demand for the product, management credits the company's effort to collect customer email addresses as well as digital marketing for generating higher traffic to the website. Also, the website has an updated, fresh look, and Lululemon offers convenient checkout options with Apple Pay. This makes it extremely fast and easy to add items to your cart and click or tap a button to complete payment.

Additionally, the company has an effective omnichannel strategy in place. If an item is out of stock on the website, you can check with any store in the country, and if a store has what you're looking for, that store can ship the item directly to you. Several top retailers are offering pickup in store and ship to store these days, and when executed properly, it's a powerful way to boost e-commerce sales and increase store productivity and returns on capital.

E-commerce was 25% of Lululemon's revenue in the third quarter, and management sees nothing in the way of that percentage moving higher. Direct-to-consumer revenue generates an operating margin of 40% compared to about 25% for store sales. That means there is still a margin expansion opportunity as e-commerce sales grow faster than the rest of the business.

Lululemon's management team are perfectionists

During the company's fiscal third-quarter 2018 conference call, management talked about the potential to raise prices on certain items, including increasing the fee on a new loyalty program they are currently testing. Lululemon's ability to raise prices in a heightened competitive environment for athletic wear shows just how much the brand is resonating right now.

Even after several years of making improvements to the company's supply chain, which has helped expand gross margin from the 40s range to the mid-50s, management continues to discuss opportunities to lower product costs and further expand margins.

During the earnings call, COO Stuart Haselden highlighted the areas of improvement management is focused on: 

For the full year 2018, we are on track to deliver an annualized increase in product margin of over 700 basis points since 2015. Our strategic supply chain programs amplified by favorable product mix and strong full price selling have driven these increases, and investors should know that we are making important new investments across our distribution network that should enable us to capture additional gains in product margin over the next couple of years.

Expanding addressable market

Lululemon is already swimming in a $300 billion athletic apparel market that is expected to keep growing over time. However, with the company experiencing strong demand for non-athletic apparel, like jackets, shirts, and pants that are suitable for the office, Lululemon has significantly expanded its addressable market.

On the call, Haselden noted that the company is in the early innings of expanding its merchandise to everyday wear, where management already sees substantial growth taking place: 

Outerwear was particularly strong for us on both the men's and women's side, with comps increasing over 150% and 40%, respectively. We've expanded the assortment relative to last year by offering more puffer and water-resistant styles also, including the Cloudscape Jacket for women and the Outpour Parka for men. We're still in the early stages with outerwear, and we're excited [about] the potential we see here.

A final word

You might have noticed that I haven't mentioned valuation among my reasons for investing in Lululemon. Some investors may shy away from the stock due to its high trailing P/E of 43, and I'm certainly not advocating that you go out and buy the stock just because of this article. However, I have followed Lululemon since I first tried the product in 2011, and I believe in the growth story.

Overall, what caused me to pull the trigger at this time is that the growth story is getting better, even while Nike and countless other retailers have expanded their athletic wear assortments. Lululemon has performed exceptionally well over the years with its core workout clothing, and now the company is demonstrating the ability to apply its design expertise to everyday wear.

Add it all up, and Lululemon looks like a long-term winner, in my view.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Lululemon Athletica Inc. Stock Quote
Lululemon Athletica Inc.
LULU
$423.54 (-2.79%) $-12.18

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
624%
 
S&P 500 Returns
140%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/07/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.