Lululemon (NASDAQ:LULU), one of the most popular athleisure-focused companies, is among the small number of retail companies that are expanding its store base during 2020's economic and COVID-19-related challenges. Here's why Lululemon is confident in its continued growth while some peers are taking a more conservative stance.

Lululemon store

Image source: Lululemon.

Lululemon is still expanding its store fleet 

While large clothing retailers like Gap (NYSE:GPS) are closing 225 stores globally (net of openings) in 2020, Lululemon continues its expansion, with plans to open 30 to 35 net new stores this year. It sees the importance of a physical presence in driving revenue growth. The athleisure retailer has focused on community-centric offerings in stores, such as group yoga classes and outdoor workouts with local ambassadors:

"Our stores are our local hub and communities across the globe, gathering spots for our ambassadors and our connection to local studios, facilitate e-commerce transactions via our ship-from-store and buy online, pick up in-store capabilities and are a portal to bring new guests into our brand, particularly men" – CEO Calvin McDonald

The specialty retailer is projecting strong holiday traffic again, as it is planning to have 70 seasonal stores in the second half of 2020, up from 51 in the fourth quarter of 2019, and 50 in the second quarter this year. Some of these temporary stores will be in locations with existing stores, in order to relieve capacity constraints and long lines.

Macro factors still favor Lululemon

As many people have adapted to more time spent at home and remote work, the sales of casual wear and athleisure continue to outpace more formal options. These secular trends should boost business at Lululemon. Nearly half of all consumers (48 percent) surveyed stated that active or athleisure bottoms replaced some of the denim jeans in their wardrobes, according to Cotton Lifestyle Monitor. The U.S. athleisure market is seen growing to $257 billion by 2026 based on a report by Allied Market Research.

"Our product, built with technical innovation and performance fabrics, is ideal for enabling the work-from-home and versatile lifestyle that has grown exponentially in the COVID-19 world," noted McDonald on the Q2 earnings call.

The company is setting up for strong holiday execution, including investing in omnichannel, and buy online, pick up in store capabilities. These should enhance the already fast-growing digital revenue growth (constant dollar e-commerce comps were up 157% in Q2). Lululemon is also adding features such as virtual waitlists to stores that notify guests when it's their turn to enter the store, to avoid waiting in lines. Impressively, nearly 400,000 shoppers used the virtual waitlist in the month of August.

Mirror acquisition could have synergies

There are synergies between Lululemon and at-home fitness company MIRROR. Beyond the company being able to aggressively grow MIRROR's revenue and client base, Lululemon can easily market MIRROR to its large customer base. It can also gain insights into customer preferences from MIRROR's data. The acquisition broadens the retailer's digital and interactive capabilities, which is especially important.

Lululemon plans to offer MIRROR in 10 to 15 U.S. Lululemon stores by the beginning of fourth quarter. There are planned investments focused on digital to grow brand awareness. The company sees revenue momentum for MIRROR during the 2020 holiday season and into 2021, as New Year's goals often spur increased interest in fitness and weight loss.

As other specialty retailers face challenges during the current economic volatility, Lululemon appears to be relatively better positioned, being in the in-demand category of athleisure with a strong brand with a dedicated fanbase. It's also implementing smart moves to improve the customer shopping experience, which should help during the important holiday season.

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