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Why Lululemon’s Best Days Are Ahead

By John Ballard – Aug 19, 2020 at 7:00AM

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The retail brand has millions of loyal customers who will upgrade to better sports apparel products.

There has been no stopping lululemon athletica (LULU -3.95%) lately. Over the last five years, the athletic apparel maker has nearly doubled its revenue, and earnings per share have grown even faster. While the COVID-19 pandemic led to a revenue decline of 17% in its fiscal first quarter (which ended May 3), e-commerce sales accounted for more than half its revenue for the period. That has investors optimistic about what's ahead for the brand in the longer term.

Its previous growth record reflects a brand that is knocking it out of the park with product design. But while Lululemon's core apparel assortment across yoga, training, and running gear continues to resonate with customers, there are still ways for the company to improve, address as-yet unmet needs for customers, and drive even more revenue growth.

As CEO Calvin McDonald stated during the 2019 analyst day presentation, "We're really just getting started." Even as Lululemon continues to expand into new geographies and enter new product categories like interactive fitness services, management is following a plan to expand its core assortment and drive higher incremental sales.

A woman jogging.

Image source: Getty Images.

Creating quick sales with new product tweaks

During the 2019 analyst day presentation, McDonald acknowledged Lululemon's advantages in designing functional apparel that meets the needs of customers who take part in sweat-producing activities. But he also pointed out that there is a lot the company isn't doing yet, and said it was leaving significant sales opportunities on the table. 

For example, McDonald said, Lululemon has excelled at serving yoga practitioners, but it has some catching up to do in its running apparel lines. "We're good in run, we're not great in run," he said.   "But what we know is that many of our loyal guests consider us for their run needs. As soon as we start filling those needs with assortment, those are pretty quick sales opportunities."

Management previously laid out a five-year growth plan for 2018 through 2023 that called for low-double-digit percentage annual sales growth, with earnings growing faster than revenue. Obviously, investors are not going to fault Lululemon much for falling behind that target due to the pandemic.

But the best thing about this five-year plan is that it is not dependent on new category growth. It is based on sales expectations from building out the core assortment. 

Recent improvements

Even with sales down during the pandemic, Lululemon was still executing its plan.

"We continue to leverage our Science of Feel product platform to solve guests' unmet needs and fuel our future growth," Chief Product Officer Sun Choe said during the fiscal first-quarter conference call.

The company introduced new innovations last quarter, including the relaunch of its proprietary Everlux fabric in two new pant styles. 

Most importantly, Choe said, "We saw virtually no cannibalization within our key pant styles, and our women's pants business was one of our best performing categories in the quarter." The lack of sales cannibalization supports McDonald's view that there are significant incremental sales opportunities to be had by continuing to adapt and find new ways to meet customers' needs. 

Another success was the new Align tank. For the first time, Lululemon took one of its popular pants styles -- in this case the Align -- and expanded it to a top. "We see this tank being a key growth driver in our tops business and see further runway for us to leverage some of our other pant franchises in similar ways," Choe said. 

Better products = better margins

From a financial perspective, filling out the assortment and generating quick sales opportunities has higher profit margins written all over it. McDonald mentioned that the company can't outspend the competition on marketing, but it doesn't need to. After all, Lululemon has grown apparel sales at a faster rate than Nike or Adidas.

But if Lululemon can do something as simple as taking an existing style of pants that sells well and turning it into a successful tank top, the apparel company can save a lot of money on marketing, keep demand up and markdowns at a minimum, and continue reinvesting in innovation to drive long-term growth.

John Ballard owns shares of adidas, Lululemon Athletica, and Nike. The Motley Fool owns shares of and recommends Lululemon Athletica and Nike. The Motley Fool has a disclosure policy.

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