lululemon athletica's (NASDAQ:LULU) first-quarter results, released last week, demonstrated the athletic apparel retailer has rebounded from the coronavirus pandemic. The results reported were helped by the fact that nearly all its stores were open this quarter (as opposed to previous quarters where some stores were temporarily shut down because of the coronavirus pandemic).
The results exceeded both management and analysts' expectations, and the better-than-expected quarter led management to increase its estimates for revenue and earnings per share for the rest of its fiscal 2021.
Let's take a closer look at the popular clothing retailer and determine if investors should consider adding the stock to their portfolios.
Lululemon reported revenue of $1.2 billion in the first quarter, a jump of 88% year over year and an increase of 57% over the same quarter in 2019. As in the fourth quarter, international revenue growth outpaced North American growth 125% to 82%.
Making the quarter more impressive was gross profit margins increasing from 53.9% in 2019 to 57.1% in 2021, reflecting the retailer's ability to sell more products without promotional activity. If it can sustain the 57% gross profit margin level for the rest of the year, it would be the highest level achieved in the last decade. The previous high coming in 2012 at 56.9%.
Signs point to higher profit margins throughout the year as U.S. consumers got a potential boost in disposable income from another round of stimulus checks. The most recent payout put up to $1,400 checks into millions of bank accounts in March and April.
Further, 2 billion vaccine doses against the coronavirus have been administered worldwide and the number of people getting ill with COVID-19 is trending downward in most places Lululemon operates. That's giving folks the confidence to leave their homes more and go shopping in person. That trend was reflected in Lululemon's first-quarter report, which showed online sales taking a smaller share of overall sales.
Lululemon has demonstrated its ability to sell premium-priced athletic apparel to customers. It has developed a reputation for selling high-performance materials for training and exercising. And that's allowing it to sell products at high margins.
In fact, over the last decade, Lululemon has maintained a gross profit margin and operating profit margin rate that was nearly 1,000 basis points higher than Nike (NYSE:NKE). Even during the crisis times of the pandemic, Lululemon maintained better margins (see chart above).
Moreover, Lululemon is competing in the global sports apparel market, estimated to grow from $188 billion in annual revenue in 2020 to $208 billion by 2025. That means the sports apparel market is projected to grow at a compound annual growth rate of $4 billion for the next five years. To put that into context, Lululemon's highest revenue year was just under $4 billion.
Is Lululemon stock a buy?
Lululemon is trading at a roughly 50% premium to Nike. However, that premium can be justified considering that Lululemon is operating at higher profit margins that it has proven to be sustainable. Further, over the last decade, Lululemon is compounding revenue at an annual growth rate triple the Nike rate. It's clear that Nike has a real competitor on its tail. And given that Lululemon generated only a fraction of Nike's overall sales, that leaves lots of room for Lululemon to capture market share.
Investors looking for a growth stock to add to their portfolios should certainly consider adding Lululemon.