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2 Reasons Lululemon Just Became More Valuable

By Jennifer Saibil – Jul 30, 2020 at 8:32AM

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The yoga-inspired apparel company is finding growth opportunities despite the pandemic.

lululemon athletica (LULU -4.28%) has been a top growth stock for a while now. Although the company posted a 17% decline in revenue in the first quarter ended May 3 (related to the coronavirus pandemic), it fared better than competing companies such as Nike, which posted a 38% decline in sales in its most recent quarter (fiscal Q4), and Under Armour, whose sales dropped 23% in the first quarter.

Here are two reasons we can expect Lululemon to get back up and dust itself off pretty quickly to return to its more typical growth pattern.

Athleisure is the new casual

Athleisure, or athletic apparel that can be worn in various everyday settings, continues to grow in prominence as a retail trend. Lululemon, which has already proved itself as an innovator in the industry, is poised to benefit from this movement.

Woman doing yoga with a computer in an apartment.

Image source: Getty Images.

COVID-19, while impacting Lululemon negatively, is also serving to drive the trend in two ways. First, it has diminished the need for professional workwear. While people are staying home and communicating through Zoom Video or other telecommuting services, they're choosing to dress in comfortable casual wear. At the same time, gym enthusiasts who are working out at home are engaging with communities of similar-minded people through company apps such as Nike's and Lululemon's. 

Lululemon has a lean model in its perennial clothing styles, which, in contrast to seasonal merchandise, do not have to be discounted at season's end and can be more easily managed. Its popular yoga pants have become a de facto uniform for fitness-loving millennials who wear them straight from the gym to pick up their kids or grab a cup of coffee. Nike is the most popular apparel brand in the U.S., but Lululemon is growing faster, and its activewear resonates with the gym-minded crowd who will work out even when stuck at home.

The broader athleisure trend has recently has forced clothing companies like Brooks Brothers and Ann Taylor to file for Chapter 11 bankruptcy protection. Both retailers specialized in office wear and higher-end clothing styles. Lululemon's emphasis on higher-end athleisure wear could be where some customers of those troubled retail chains opted instead to make clothing purchases.

The Mirror acquisition is a tailwind

In late June, Lululemon announced it was acquiring at-home fitness company Mirror. Lululemon had already invested in Mirror, and there's a strong synergy between the two companies, as Mirror users are Lululemon's ideal clients, and several of Lululemon's brand ambassadors already give classes on Mirror's platform. 

Despite their connection, the partnership still gives Lululemon new outlets for further growth. Lululemon CEO Calvin McDonald said:

"In 2019, we detailed our vision to be the experiential brand that ignites a community of people living the sweatlife through sweat, grow and connect. The acquisition of MIRROR is an exciting opportunity to build upon that vision, enhance our digital and interactive capabilities, and deepen our roots in the sweatlife."

In 2020, it's clear that customers are moving toward companies that offer an experience, and Mirror offers Lululemon a new way to bring that home -- literally -- for loyal customers. During the first quarter, the direct-to-consumer channel grew 68% and accounted for more than half of total sales. Mirror is another way to leverage those deep connections.

For now, it looks as if working from home is going to remain in place for a prolonged period. For example, Alphabet recently announced that its employees will be permitted to work from home until summer 2021. With more workers staying home, Mirror gives people a fun and compelling way to stay active indoors.

Opportunities loom

Lululemon sports a fairly high trailing-12-month price-to-earnings ratio of 75, which might put its stock price out of range for investors seeking value stocks. But it has proven that it's more than hype, consistently growing by double digits before the pandemic hit and moving in all of the right directions. Plus, the strength of the athleisure movement is helping to propel it forward. These factors should help make Lululemon stock even more valuable.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Lululemon Athletica, Nike, Under Armour (A Shares), Under Armour (C Shares), and Zoom Video Communications and recommends the following options: short August 2020 $130 calls on Zoom Video Communications. The Motley Fool has a disclosure policy.

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