There are few apparel companies that have upended the industry as much as lululemon athletica (LULU +1.48%). The company's Align pants are best-sellers worn by fans and celebrities alike, and its integration of athletic wear and casual attire helped create the athleisure trend.
But it's not only style that has catapulted the company into the limelight. Lululemon has developed an exemplary digital program that makes it easy for customers to shop anywhere, any time. And this is the main feature that will keep its growth soaring.
Image source: Getty Images.
Digitally-powered sales
Lululemon's digital strategy was key in helping the company make it through store closures and outperform competitors during the pandemic. CEO Calvin McDonald said on a December earnings call, "We have been investing in our digital capabilities and enhancing the experience of our e-commerce sites for several years, which enabled us to quickly respond to the accelerated shift to omni this year."
| Metric | Fiscal Q3 | Fiscal Q2 | Fiscal Q1 |
|---|---|---|---|
| Total sales growth | 22% | 2% | 17% |
| Digital sales growth | 94% | 155% | 68% |
| Digital sales as a percentage of total sales | 43% | 61% | 54% |
Data source: lululemon athletica quarterly reports.
By comparison, rival Nike's fiscal first quarter saw digital sales increase 82% year over year, accounting for only 30% of revenue.
Offering new options to fit consumer needs
Lululemon has many advantages in its market, but digital offerings are an important component of the whole. The company launched new features to provide a better experience while social distancing rules are in effect, such as a virtual waitlist so shoppers can get alerted when it's their turn to enter the store and point-of-sale devices so workers can help customers with transactions like returns outside of the store. The company is also opening pop-up shops in dense locations so customers can get into stores faster.
The company acquired connected fitness company Mirror in early 2020 and is still integrating the products into its platform. Mirror potentially brings in new customers and helps develop a fitness ecosystem where customers can get all of their needs fulfilled in one place. The company is building Mirror shops-within-shops in 18 locations to assess how to proceed with a total integration as management hopes to launch similar shops at hundreds of its stores in 2021.
Most retailers are seeing a natural decline in digital growth as stores reopen, but they're picking up the slack with in-store sales. Yet not all of that digital growth will be lost, as online becomes the most important frontier in retail. And companies like Target continue to see high growth in services that blend physical shopping with e-commerce such as drive-up and in-store pickup. Lululemon is highly adept in this area, and like Target, the apparel retailer will ship items to customers directly from its stores, a cost-effective solution for faster delivery.
Keeping up strong growth
The fiscal fourth quarter, which includes the holiday season, is typically retail's best quarter. Lululemon's performance during this time will be an important indicator of how well the company can sustain its growth as the pandemic hopefully comes to an end. The company already announced record-breaking Black Friday e-commerce sales, and there's still a week left in the holiday shopping period as of this writing. In the latest earnings release, however, management declined to provide guidance due to continued uncertainty related to COVID-19.
Lululemon stock has more than tripled in just the past two years and is now trading at 82 times 12-month trailing earnings. As rich as that may seem, the company has so much going for it that I don't believe the premium should deter potential investors.
