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5 Reasons You'll Regret Selling Lululemon Stock

By John Ballard - Apr 11, 2021 at 10:44AM

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All signs point in an upward direction for this growing fitness brand.

Shares of lululemon athletica (LULU -3.39%) shot up 50% in 2020. Investors were obviously thrilled with the company's blistering rate of e-commerce growth during the pandemic. But since reaching a high of $399 last year, the stock price has cooled off and currently sits at $312. 

The stock could be down for a variety of reasons, such as valuation concerns or a rotation from growth to value stocks. Either way, investors who sell shares of Lululemon may miss out on life-changing returns over the next few decades.

Here are five reasons that illustrate the potential for this growth stock to power your retirement.

A man and woman practicing yoga.

Image source: Getty Images.

1. 2020 reset management's expectations

Last year, Lululemon showed why its e-commerce business is second to none. For the full year, e-commerce revenue doubled and represented 52% of the business in the fiscal fourth quarter. There are many retailers that would love to report those numbers.

During the fiscal Q4 earnings call, CEO Calvin McDonald said: "2020 has reset our expectations for what is possible." He added, "These results were significantly ahead of our initial expectations and enabled us to achieve, three years early, our 2023 goal of doubling our e-commerce revenue from 2018 levels." 

2. Store expansion

The growth of e-commerce might have reset expectations for what is possible, but investors should also pay attention to what management said about its store-opening opportunities.

"We continue to be underpenetrated from a brick-and-mortar perspective across all our markets, including North America and around the world," McDonald said. 

Lululemon opened 30 net new company-operated stores in 2020, leaving the total store footprint at 521 globally to finish the year. Most of these new stores were opened in the Asia Pacific region, where Lululemon continues to experience its strongest growth. 

3. Massive international opportunity

Lululemon is becoming a global brand. While North America revenue increased by 8% last year, international markets grew 31%. 

"At only 14% penetration, we are in the very early days of our journey outside of North America," McDonald said. 

4. New product opportunities

Lululemon continues to gain market share across men's and women's categories, but what's exciting is that management continues to identify opportunities to spread its wings within the broader fitness market.  Here are two big ones that management is enthusiastic about.

Interactive fitness: Lululemon entered the fitness equipment market last year with the $500 million acquisition of Mirror -- an interactive display that costs $1,495 and offers workout classes by professional trainers for $39 per month. It generated $170 million in revenue for the full year, and management anticipates further growth of 50% to 65% in fiscal 2021. 

During the call, CFO Meghan Frank said: "Mirror remains early in its life cycle and we've made the strategic decision to invest more than initially anticipated to build long-term value in this business." 

Footwear: Lululemon highlighted this opportunity at its analyst day presentation in 2019. Lululemon has previous experience selling footwear, as part of a partnership with APL a few years ago. What management learned was that customers resonate with Lululemon selling footwear. 

"[W]e are building toward the early 2022 launch of our technical footwear, which will allow us to provide guests with head-to-toe solutions," McDonald announced during the Q4 earnings call. 

Given the high customer loyalty of the Lululemon brand, I believe investors are underestimating the sales opportunity of Mirror and footwear.

5. Building momentum

Lululemon just reported its third consecutive quarter of improving revenue growth. After it reported a 17% decline in revenue at the start of the pandemic, revenue has shown steady improvement -- up 2% in the second quarter, 22% in the third, and 24% in Q4. 

Lululemon is poised for a big year. Guidance for fiscal 2021 calls for adjusted earnings per share to increase by 35% at the midpoint of the guidance range. With adjusted earnings expected to land between $6.30 to $6.45, that puts the stock's current forward price-to-earnings (P/E) ratio at 49 based on the low end of the range.

The stock looks expensive, but you can't squeeze a company's intrinsic value into a single metric, such as a P/E ratio. Considering all the opportunities for this business to expand, I believe investors are still underestimating Lululemon's long-term growth potential.

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