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How Lululemon Will Outlast the Coronavirus

By Dan Caplinger - Mar 30, 2020 at 11:07AM

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The yoga specialist kept growing and has confidence that it can make it through the crisis.

The retail world has gotten hit by the coronavirus storm, and lululemon athletica (LULU -3.39%) hasn't been immune from its effects. With the COVID-19 outbreak spreading around the world, Lululemon has temporarily closed stores in North America and Europe, and many investors have been nervous about what long-term impacts those closures could have on the yoga apparel retail specialist. Yet those who've been invested in Lululemon for a while have seen how resilient the company can be when faced with challenges.

Coming into its fiscal fourth-quarter financial report on March 26, Lululemon shareholders hoped that the retailer would have impressive performance in its last pre-coronavirus quarter. Lululemon delivered on that front, but more important was the optimism it had in suggesting how it intends to deal with the pandemic in the months to come.

A sign of Lululemon's logo hanging outside of a brick building

Image source: Lululemon.

Lululemon keeps on growing

Lululemon's fiscal fourth-quarter results continued the strong upward momentum we've seen from the business for a while. Net revenue climbed 20% to $1.40 billion, staying consistent with the growth rates we've seen in recent periods. Net income climbed 36% to $298 million, and the resulting earnings of $2.28 per share topped the consensus forecast among investors by $0.04 per share.

Lululemon's status as a top growth stock remained intact. Looking at fundamentals, comparable sales growth accelerated to 20%, with contributions both from its store locations and its online business. Comparable-store sales were up 9% for the quarter, giving Lululemon an identical 9% rise in comps for the full year. Direct-to-consumer revenue was up a whopping 41% year over year for the holiday quarter, showing just how important the e-commerce channel has become for the yoga retailer.

The company also kept boosting its margin figures, showing greater internal efficiency. Gross margin climbed to 58%, up seven-tenths of a percentage point, and operating margin climbed 1.4 percentage points to 29.8%. That closed a strong 2019 on the margin front, with gains of around three-quarters of a percentage point for both measures.

Lululemon also kept building out its store network. With 12 net new stores opened over the past three months, Lululemon now has 491 locations. Square footage expanded by 76,000 to 1.68 million systemwide.

CEO Calvin McDonald reflected on a great performance. "2019 was a strong year for lululemon," McDonald said, "as our teams executed against our Power of Three growth plan." The CEO has often noted how important the priorities of product innovation, customer experience, and market expansion will continue to be for the retailer's overall success.

How will Lululemon weather the coronavirus storm?

Lululemon is mindful of the severity of the situation it faces because of the COVID-19 pandemic. As McDonald put it:

We are now navigating an extraordinary environment, which is currently impacting our business. The strength of our brand and strong financial position will help us manage through the day-to-day, while continuing to effectively plan for and invest in our future.

The retailer described how it's dealt with the coronavirus outbreak so far. In mainland China, Lululemon closed all of its retail locations back in February. A month and a half later, all but one of those locations had reopened as the worst of the pandemic passed. This month, Lululemon followed up with closures throughout North America and Europe as well as in Malaysia and New Zealand. Although it can't predict with certainty what the disease will do, the yoga specialist likely hopes that it will follow a similar trajectory and allow its stores in these places to reopen in the near future.

During the crisis, Lululemon is remaining connected with its customers. The company had nearly 170,000 guests join its ambassadors for live classes on Instagram. That builds on the success Lululemon had in China during the worst of the outbreak there, where online sessions for yoga, meditation, Pilates, dance, and training helped it get thousands of new followers in the WeChat platform.

Lululemon investors weren't entirely comfortable with the company's decision not to offer financial guidance for fiscal 2020, and that sent share prices down immediately after the release. Still, Lululemon is doing everything it can to make it through the coronavirus crisis as well as possible. Based on its early work, shareholders should be optimistic about Lululemon's long-term prospects to recover fully and keep growing.

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