Lululemon leveraged its early-mover's advantage in premium yoga apparel to become a dominant force in the athleisure market. It also strengthened its direct-to-consumer channels and locked in shoppers with free yoga classes and community events.
Target renovated its stores, launched more private label brands, expanded its e-commerce ecosystem, and used its brick-and-mortar stores to fulfill online orders. It matched Amazon and Walmart's prices, launched comparable same-day delivery services, and invested in better employee training.
Those strengths helped Lululemon and Target weather the COVID-19 crisis this year. Lululemon's stock rallied 60% this year even as its sales temporarily declined. Target's stock advanced about 30% as the pandemic drove more shoppers to its brick-and-mortar and online stores.
Lululemon clearly generated stronger returns for investors than Target, but will that trend continue next year after the pandemic passes? Let's take a fresh look at both retailers to find out.
How fast is Lululemon growing?
Lululemon's revenue rose 24% in 2018 as its comparable sales grew 18%. In 2019, its revenue rose another 21% as its comps grew 17%.
Its direct-to-consumer sales, which mainly flow through its online and brick-and-mortar stores, rose 45% in 2018 and 35% in 2019. Its total store count also rose from 440 in 2018 to 491 in 2019.
Its gross and operating margins expanded over the past two years, and its net income increased 87% in 2018 and 33% in 2019.
Lululemon attributed that robust growth to its "Power of Three" plan, which aims to generate double-digit annual revenue growth through the end of 2023 by doubling its men's revenue, doubling its digital revenue, and quadrupling its international revenue.
But in the first half of 2020, Lululemon's revenue dipped 6% year-over-year as the pandemic shut down its brick-and-mortar stores. However, its direct-to-consumer sales still surged 68% year-over-year in the first quarter, and soared 155% in the second quarter as those shoppers shifted online.
Unfortunately, COVID-19-related costs and higher fulfillment expenses for online orders reduced its margins, and its net income plunged 48%. However, Lululemon continued opening new stores throughout the crisis, and ended the first half of the year with 506 locations.
Those new store openings, along with its reaffirmed commitment to its Power of Three plan last quarter, indicate Lululemon's growth will accelerate after the pandemic passes. Analysts expect Lululemon's revenue to rise 4% this year as its earnings dip 15%. But next year, they expect its revenue and earnings to grow 27% and 53%, respectively.
How fast is Target growing?
Target's revenue rose 4% in 2018 as its comps grew 5%. Its revenue grew another 4% in 2019 as its comps increased 3%.
That stable growth was supported by its strong digital comps, which surged 36% in 2018 and 29% in 2019. Target's total number of stores also rose from 1,844 in 2018 to 1,868 in 2019 -- which expanded the reach of its fulfillment network.
Its gross and operating margins also expanded in both years, thanks to a better product mix and the use of its stores to fulfill online orders. Roughly 75% of the U.S. population already lives within ten miles of a Target store, which makes it easy to achieve quick in-store pickups and deliveries. As a result, its net income from continuing operations grew 1% in 2018 and 12% in 2019.
In the first three quarters of 2020, Target's revenue jumped 19% year-over-year as the pandemic drew shoppers to its stores. Its digital comps surged 141% in the first quarter, 195% in the second quarter, and 155% in the third quarter -- indicating it has plenty of staying power against Amazon.
Target's gross margin declined as it sold more lower-margin products, but its operating margin expanded as it reduced its marketing expenses. That expansion boosted its net income from continuing operations 23% year-over-year in the first nine months.
Analysts expect Target's revenue and earnings to rise 18% and 42%, respectively, this year. But next year, they expect its revenue and earnings to decline 3% and 7%, respectively, as the pandemic passes and it faces tougher year-over-year comparisons.
The valuations and the verdict
Lululemon's stock isn't cheap at nearly 60 times forward earnings, but its resilience throughout the crisis and its rosy long-term expectations arguably justify that premium.
Target's stock looks cheaper at 21 times forward earnings, and it's a Dividend Aristocrat that pays a forward yield of 1.6%. However, its growth will likely decelerate next year as Lululemon's growth accelerates again.
I like both of these stocks, but Lululemon is a more compelling buy than Target right now. It dominates its high-growth niche, it mainly serves affluent shoppers who aren't as exposed to the pandemic's economic impact, and its stock doesn't seem expensive relative to its long-term growth. Target's still a solid long-term investment, but it will likely underperform Lululemon next year.