lululemon athletica (LULU +1.30%) has been a standout in the challenging apparel retail space.
While many clothing retailers are reporting declining store traffic and mixed holiday sales, the yoga-focused retailer continues to raise guidance and beat earnings expectations. Shares are up nearly 90% in 2019, and valuation is at 40 times forward earnings, far above the consumer discretionary average and the S&P 500 overall.
On Monday, company management increased guidance for the quarter and shares jumped another 5%. Do Lululemon shares have more room to run in 2020?
Image source: Lululemon.
What's driving the continued growth?
On Monday, Lululemon raised its fourth-quarter earnings and revenue guidance on strong holiday sales momentum. Fourth-quarter earnings per share is now expected to be $2.22 to $2.25, up from $2.10 to $2.13. Sales for the quarter are now projected to be $1.37 billion to $1.38 billion, up from $1.315 billion to $1.33 billion. The lifestyle retailer's holiday traffic was impressive. Strategy firm Placer.ai notes that Black Friday traffic this year was 480% above the baseline traffic for the period from Jan. 1, 2018, through November 2019.
The specialty retailer also easily beat earnings and revenue expectations during its third-quarter report, while raising its full-year outlook for the third consecutive quarter. Growth was driven by strong sales from existing stores, new stores, and e-commerce. The company's new product lines like streetwear and outerwear are also helping boost sales.
Future drivers of growth include Lululemon's expansion into the men's market and innovating with new store formats and product improvements. The lifestyle trend toward healthy living and active lifestyles is only becoming more popular.
Executing well on a five-year growth strategy
Management is working to double Lululemon's men's business by the end of 2023. The company's five-year vision also includes "doubling digital and quadrupling international businesses" in the same time frame.
International accounts for only about 15% of sales, but the strategy to grow store count across Europe and Asia is working, as international sales increased 35% in the third quarter. Executives view the market in China as particularly promising. The company's store base doubled in China last year, and e-commerce sales grew over 60% in the third quarter. Last year, Lululemon's new store in Hangzhou had the best opening performance to date of any store in China.
Lululemon also recently hired Nikki Neuberger, ex-Nike and Uber executive, as its new chief brand officer. Neuberger was global head of marketing for Uber Eats, where she led the expansion into 36 countries. This should aid Lululemon's international expansion plans.
The retailer's foray into beauty products demonstrates that Lululemon continues to innovate and isn't afraid to experiment with new product lines. Beauty editors are impressed by its recently launched five-piece Selfcare line, which will also be sold at Sephora. Sun Choe, Lululemon's chief product officer commented: "Like our apparel, Lululemon Selfcare has been designed with function at its core and created to support guests pre- and post-workout." Other innovations that the company has worked on include two experiential stores and a new loyalty program in four cities.
Are shares a good buy now?
Lululemon trades at 43 times forward earnings, compared to 20 times for the S&P 500 and 25 times for the consumer discretionary sector. For 2021, the company is expected to show earnings growth of 19% and sales growth of 15%. Even though the valuation isn't inexpensive, Lululemon's strong performance and ability to surpass growth expectations make the stock a buy, especially on any pullbacks. The stock is listed as one of the Motley Fool's top 20 stocks to buy in 2020. The company also has multiple levers it can pull to increase future sales, including international expansion, increased men's product sales, and digital businesses.
