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3 Reasons Lululemon Can Continue to Grow Despite the Coronavirus

By Jennifer Saibil - Apr 3, 2020 at 7:40AM

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Though many of its stores remain closed, the athletic apparel retailer can lean on its strong digital operations to keep the business going.

After a year of incredible growth, both in its business operations and its stock price, lululemon athletica (LULU 1.10%) showed that it has what it takes to keep the momentum going after a solid fourth quarter.

Unlike overvalued stocks that are big on hype but low on delivery, Lululemon is a growth stock with a proven and profitable business model. So while the COVID-19 pandemic will take a toll on the company like it will in most industries, Lululemon will continue to outperform long term after what's likely to be a near-term slowdown.

Women doing yoga.

Image source: Getty Images.

Great products

Customers continue to flock to Lululemon's stores to get their fix of athletic-inspired apparel and accessories. The company has a "power of three" mission, which is to increase sales by low double digits by expanding the men's category, the digital channel, and international sales. It has has been meeting its goals and saw better-than-expected numbers in the fiscal fourth quarter ended Feb. 2, 2020.

YOY Growth

Revenue

Comparable-store
Sales

Men's

Digital

International

Q4 2019

20%

9%

39%

41%

25%

Data source: Lululemon financial filings and management comments.

Will this sentiment change now that stores are closed or people are not out hitting the gym? Maybe not. The company is working to stay at the forefront of customers' minds by offering all sorts of online events, stories, and resources for its community of like-minded, fitness-loving individuals.

CEO Calvin McDonald tried to reassure investors when he said, "[We] do not believe the current situation will change the trend toward people wanting to live an active and healthy lifestyle."

Tight operations

One of the reasons Lululemon has solidly outperformed the broad market is its consistent ability to turn revenue into bottom-line earnings. Diluted earnings per share in the fiscal fourth quarter increased 23% year over year to $2.28 as gross margin improved 70 basis points to 58.0%.

The company also has a healthy supply chain with strong vendor partnerships that helps it maintain proper inventory levels. And it has more than $1 billion in cash and no debt, a great position to work from given the uncertainty surrounding the global pandemic.

Strong DTC business

Lululemon has delivered outstanding digital growth over the past four quarters as well as strong comparable-store growth. 

YOY Growth

Q4 2019

Q3 2019

Q2 2019

Q1 2019

Comparable-store sales

9%

11%

11%

8%

Digital

41%

30%

31%

35%

Data source: Lululemon financial filings. Table by author.

This is the age of direct-to-consumer sales, and Lululemon is poised to take advantage of this trend with a digital channel that's delivering impressive results. Regarding recent store closures, McDonald noted during the recent earnings call, "Since closing, our digital business has picked up, but it's obviously not recovering all the volume loss from our store networks being closed, but we have seen our store -- or our online business accelerate in terms of growth."

Unlike rival Nike, which dealt with store closures in China during its fiscal 2020 third quarter and is already getting back on track in that region, Lululemon only closed its stores after its fiscal fourth quarter, so the full effects of the outbreak will not show up until the next report. However, just as Nike has been able to weather the storm backed up by its solid DTC operation, Lululemon is seeing digital carry some extra weight, even if total sales do slow during this unprecedented time.

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 has a disclosure policy.

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Lululemon Athletica Inc. Stock Quote
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