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3 Reasons Why Lululemon Will Continue to Gain in 2020

By Jennifer Saibil – Feb 2, 2020 at 11:13AM

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The company is earning its premium valuation with better-than-expected holiday numbers.

lululemon athletica (LULU 0.50%) is the improbable story of a niche athletic-wear company becoming one of the hottest stocks on Wall Street. Many factors have conspired to make that a reality, including some luck and favorable retail trends, but Lululemon has also made important moves to fuel its powerful expansion. 

Shares of the Vancouver-based company rose an impressive 91% in 2019 and are continuing that streak in the first month of the new year. Lululemon is positioned to keep growing in 2020 and beyond -- here are three ways the company is making that happen.

Woman running.

Image source: Getty Images.

Incredible growth rates

The demand for Lululemon's products is enormous, helping fuel tremendous sales growth over the past year.

Metric

Q3 2019

Q2 2019

Q1 2019

Q4 2018

Total sales growth (YOY)

22.5%

22.1%

20.4%

25.7%

Data source: Lululemon quarterly reports. YOY = year over year.

Holiday sales were better than expected, and at the beginning of January, Lululemon raised its fourth-quarter revenue guidance from between $1.315 billion and $1.330 billion to between $1.370 billion and $1.380 billion. Comps growth should be in the mid to high teens.

Back in April 2019, the company unveiled its Power of Three plan, which aims to keep growth in the low double digits by doubling the men's and digital categories, while quadrupling international sales. Since then, there have been three earnings periods, and based on the year-over-year growth rates below, the company is very much on track to fulfill these objectives.

Category

Q3 2019

Q2 2019

Q1 2019

Men's

38%

35%

33%

Digital*

30%

31%

41%

International

35%

35%

39%

Data source: Lululemon quarterly reports. *Digital growth based on comparable sales. https://lululemonathleticainc.gcs-web.com/static-files/e6257780-9b9d-47c8-aae9-bc4284f2428b

Efficient management

The company runs operations efficiently, which means the dollars it's spending are being put to good use. In the most recent quarter, gross margin expanded 70 basis points year over year to 55.1% of revenue. Earnings increased 35% to $0.96 per share, while selling, general, and administrative expenses accounted for 35.9% of net revenue, down from 36.2% in the third quarter of 2018. 

Lululemon recently hired Nikki Neuburger as chief brand officer, an industry veteran who spent 14 years at Nike and most recently spearheaded Uber Eats' international expansion. Bringing in an outsider who has successful experience moving companies forward through marketing and global expansion is just what relative newcomer Lululemon needs to keep growing.

A strong sense for what the customer wants

Lululemon has its finger on the pulse of retail, constantly rolling out new products to stay up-to-date, including expansions into undergarments, outerwear, and a men's line, which is seeing the highest growth.

The company is not short on product innovations, among which are its high-tech fabrics meant to support different activities, such as yoga and running. Nulu, Nulux, and Everlux are company exclusives.

The company also brings lifestyle components that are meaningful to its customers under one roof, such as offering classes on site, which about a third of members take part in. The company says "over 90% of them [sweat] with us for the first time."

Lululemon invests in its digital experience as well, recently updating it with better product displays, information, and more efficient personalization. In line with those efforts, "buy online, pick up in store" has become an important element of the company's fulfillment strategy, and it has 80% of these purchases ready for pickup within an hour. 

The company has everything in place to keep up the momentum behind both its business and share price.

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Lululemon Athletica and Nike. The Motley Fool recommends Uber Technologies. The Motley Fool has a disclosure policy.

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Lululemon Athletica Inc. Stock Quote
Lululemon Athletica Inc.
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