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Forget Gap, Lululemon Is a Better Retail Stock

By Pearl Wang - Updated Feb 11, 2021 at 6:25PM

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While both businesses benefited from the trend favoring comfortable athleisure, one has more growth potential.

Athleisure has seen tailwinds from the effects of the COVID-19 pandemic as people spend more time at home and work remotely, and some retailers are better positioned to benefit from the trend. lululemon athletica (LULU 1.04%) and Athleta, part of Gap (GPS -2.32%), are both popular retailers of apparel and wellness products. Sales at Athleta, the standout segment within Gap, increased by double digits in the latest quarter. However, Lululemon has better growth prospects.

Here are three reasons why Lululemon's positive trajectory is likely to continue and why it's the better stock.

The exterior of a Lululemon store on a city street

Image source: Lululemon.com.

1. Lululemon should continue to thrive post-COVID-19

While nobody's sure when COVID-19 will subside, consumers are likely to continue favoring comfort and athleisure even after a return to normalcy. The global athleisure market is projected to reach $257.1 million by 2026 from $163.7 million in 2019, a compound annual growth rate (CAGR) of 6.7%, according to Allied Market Research.

Lululemon's business has momentum -- the company recently raised its prior guidance and now projects revenue to hit the high end of its mid-to-high teens expectation, and adjusted earnings per share to the high end of its mid-single digits. CEO Calvin McDonald cited strength over the holiday period and reiterated confidence about growth in 2021.

For its third quarter (ended Nov. 1), Lululemon reported an increase in net revenue of 22% year over year, with gross margin expansion of 100 basis points (or 1 percentage point) to 56.1%. Adjusted earnings per share was $1.16, beating the $0.96 of a year ago and consensus estimates of $0.88.

While Athleta is also in a good spot to benefit from the growth in athleisure, its parent company Gap's revenue expansion has been slower. Gap's latest quarterly revenue (for the period ended Oct. 31) was flat year over year, with earnings per share of $0.25 versus $0.53 a year ago,  and below consensus estimates of $0.32. The company gave guidance for the fourth quarter for flat to slightly higher net sales year over year.

2. Lululemon is focusing on product innovation

Product innovation is key to Lululemon's growth strategy. The company plans to launch more products offering its "Science of Feel" technical innovations in 2021, which have resonated well with customers. McDonald commented about customer preference for innovative, quality athleisure on the third-quarter earnings call, saying, "Our guests have been demanding technical product that offers comfort and versatility as they spend more time working and sweating from home." The company is also launching a 3-D yoga mat in 2021, "one of the first in the world designed with a textured surface to better enable body alignment during your practice," McDonald said.

Lululemon has been highly focused on its men's business, with a goal to double it by 2023. Currently, this segment makes up about 24% of total revenue, while the women's segment accounts for about 70%. The company saw a sequential improvement in the men's business in the third quarter compared to the second, boosted by share gains and a positive consumer response.

While Athleta has also launched new products with technical features, it's been less focused on consistent launches and updates. In 2019, Athleta announced 60% of its materials were made from sustainable fibers as part of a new initiative. While Athleta sells quality athleisure, it does not have consistent new product and feature offerings like Lululemon.

3. Lululemon has a strong brand that resonates with consumers

Athleta also does not have the same brand strength and recognition as Lululemon. As evidence of Lululemon's premier brand, the company notched its "strongest quarterly market share gain in recent history" during its third quarter, with a 1.4-point share gain in the U.S. adult active apparel market, according to data from the NPD Group.

Lululemon is continuing to invest in its brand reach. It launched a popular membership program in September in a handful of cities, with Chicago, Boulder, and Denver now at capacity due to high demand. The program offers members local and digital fitness classes; as well as local events, special shopping promotions, and exclusive Lululemon gear. There are also workshops, like the virtual coaching on emotional fitness hosted by brand ambassador Gabrielle Bernstein, which 500 people attended.

The June 2020 acquisition of at-home fitness company Mirror offers more brand-building potential for Lululemon. Mirror offers live fitness classes on its wall-mounted device. Offering interactive workout platforms will put Lululemon's products and brand in front of a well-targeted community of people who prize fitness.

Investors should consider buying shares of Lululemon over Gap. Lululemon's execution is strong and has the ability to thrive during and post-COVID-19. When consumers resume in-store shopping in greater numbers, Lululemon will likely see a boost in sales, helped by its innovative products and well-executed membership and engagement strategies.

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Stocks Mentioned

Lululemon Athletica Inc. Stock Quote
Lululemon Athletica Inc.
LULU
$274.04 (1.04%) $2.82
The Gap, Inc. Stock Quote
The Gap, Inc.
GPS
$10.93 (-2.32%) $0.26

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