Over the last five years, shares of lululemon athletica (LULU 1.45%) have soared 550%, but it's not the end of the journey for this emerging athletic apparel powerhouse. Lululemon still has huge growth opportunities across international expansion, new categories, and continued development of its omnichannel strategy.
Here's a deeper dive into each of these long-term growth drivers.
Lululemon has been executing its five-year growth plan, which involves doubling its men's and e-commerce businesses from fiscal 2019 levels by fiscal 2023. The coronavirus pandemic slowed its progress this year, with total revenue up just 2% in the fiscal second quarter, but Lululemon should still reach those goals within the planned five years.
The third pillar of Lululemon's Power of Three growth plan includes quadrupling international revenue. This will have a big impact on Lululemon's ability to achieve global brand awareness and deliver wealth-building gains to investors.
Lululemon's international business grew 37% year over year in the fiscal second quarter and made up 16.2% of total revenue. Lululemon is concentrating the bulk of its new store openings in Asia. So far in fiscal 2020, Lululemon has opened eight new stores in China, which represents most of the company's openings this year.
The brand has proven itself on its home turf of North America, but with the international business growing at this pace, Lululemon is on its way to becoming a dominant global apparel brand.
By 2025, it's a good bet that Lululemon will have expanded successfully into at least one new product category. Lululemon management said as much in a 2019 analyst presentation, noting that it sees the company as being in business to solve guests' unmet needs, something that it is doing better than competitors.
In recent years, Lululemon has had great success with its Office Travel Commute line, which has given the design team expertise in outerwear. In 2020, Lululemon saw a major demand shift to comfortable clothing for working and sweating at home, and this trend led to new style introductions in its On The Move collection.
Investors should take note of Lululemon's successes in out-of-studio wear, especially jackets and sweats. It shows that the brand may have as much potential selling general apparel for everyday wear as it has in core performance categories like running and yoga.
What's more, CEO Calvin McDonald mentioned that Lululemon will be in footwear at some point. During the analyst day in 2019, he said, "We have identified whitespace that we can create within the footwear category, and we will be in footwear."
The introduction of new categories could allow Lululemon to maintain sales momentum longer than investors expect. At the 2019 analyst day, management guided for low teens percentage revenue growth through 2023, with higher margins driving faster growth in earnings per share. But McDonald added an important footnote by stating that new categories will be "incremental" to these growth targets.
There are several initiatives in place right now that could lead to significant new business lines in the next five years. These are membership, new store concepts, and introducing new ways to connect with the brand, such as Mirror, the interactive fitness platform that Lululemon recently acquired.
It's still in the early stages, but Lululemon is continuing to test its new loyalty program in select cities. It's currently being tested in Edmonton, Chicago, and Denver, and recently launched in Toronto. The combination of membership and Mirror will also give Lululemon valuable insights in customer behavior that will assist in product development going forward.
In addition to opening new stores, Lululemon is going to expand its square footage with store expansions. In fiscal 2019, the company began testing two experiential stores in Chicago and Minneapolis. These new store concepts are building a sense of community around the brand with sweat classes, locker rooms, healthy food offerings, and an enhanced shopping experience.
The main takeaway
Lululemon is investing in the future, so expect the yoga apparel specialist to evolve and grow over time. Consider that Mirror is on pace to generate $150 million in revenue this year, but given the growth of the interactive fitness market (e.g. Peloton Interactive), Mirror could easily grow into a sizable business for Lululemon. That's just one opportunity.
It's for all these reasons that Lululemon still has a long journey ahead. Despite the stock's high valuation, I would look for opportunities to buy, not sell, this growth stock.