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Here's Why Lululemon's Business Performed Well Even While the Pandemic Disrupted Fitness

By Jon Quast - Updated Jun 22, 2021 at 4:56PM

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Strong brand awareness has created an enviable direct-to-consumer business model powered by an e-commerce surge.

The COVID-19 pandemic made 2020 a challenging year for fitness stocks. But in this video clip from Motley Fool Live, recorded on June 15, Motley Fool Bureau Chief of Consumer Goods Jena Greene discusses with Fool contributor Jon Quast how a strong direct-to-consumer business for lululemon athletica (LULU -0.57%) helped it thrive while other fitness brands floundered. 

Jena Greene: We are going to be talking about some consumer goods stocks that also have to do with health. So who better to discuss it with me than Jon Quast and Corinne? If you guys have any questions in the meantime, log onto Sli.do, the username I believe is MFLive, L-I-V-E. So if you have any questions, hop on there, ask away, and we will be taking that toward the end of the show, the second half of the show.

As I mentioned before, we're going to talk about fitness changes during the pandemic. The coronavirus has touched virtually every aspect of our lives, and I mean that virtually, like truly everything is now virtual, and fitness is no exception to that. People are working out differently. Some are working out more often than normal. They are connecting in different ways. So we're going to talk about some stocks that have fared well because of these changes, and some that have fared not so well because of these changes.

Let's start out with some basic stats. Around 17% of gyms have shuttered permanently across the U.S. in 2020. So that's nothing to sneeze at. I know personally being here in D.C., a lot of my local gyms have closed down, and the ones that have reopened have seen anemic attendance. Not many people want to work out in a communal setting anymore, and that means that that's about $14 billion lost in revenue for those gyms just between March and August of 2020. And that's a billion with a B. So it's being felt in every corner of the United States for sure.

It also means that the pie is a lot smaller. Companies have had to be dynamic and adapt to compete for smaller portions of the pie. Certain companies that supply at-home workout equipment, for example, like Peloton (PTON -5.48%) and Nautilus have seen insane growth. Peloton has seen a 100% revenue increase year-over-year, which equates to about $1.8 billion. Billion with a B. Their first billion revenue increase, and that's smaller total pie and performance is not evenly distributed. Some companies have done well like Peloton, like Nautilus, others not so well like Planet Fitness, for example. That communal gym field just doesn't hold the same appeal that it used to a couple of years ago.

And so yeah, let's talk about a company that's done well, this is a favorite of mine. I'll kick it off. Lululemon, I've talked about before. This has been a favorite of mine for some time now. It makes up, perhaps embarrassingly, more than quarter of my portfolio. I'm a huge fan of it. I spend a lot of my money there. So I like to think of it as boosting the stock. I'm doing my part.

Jon Quast: There you go.

Greene: [laughs] It's been a favorite of mine for some time now. Since it's Vancouver-based inception in 1998, Lulu has managed to elevate itself from the brand of college sorority sisters to a well regarded household name. It's done strategic partnerships with high-end fitness brands and experiences that have only worked to elevate it as an attainable status symbol for fitness fanatics alike. It's got slightly higher price points compared to its competitors like GAP, Nike, Adidas, which give a competitive edge with some sticky crisis resistance all of 2020.

Sales are rare, but customers are fiercely loyal due to strong brand awareness and it's successful social pushes that's paid of. E-commerce continues to outperform, raking in just over $545 million in net revenue this past quarter. Even more impressive is that all of those online sales are direct-to-consumer. So people aren't getting Lululemon from Dick's or Amazon the way that they might for Nike or Adidas. They have to go to lululemon.com. International has also been going gangbusters, it's outperforming and is on track to quadruple it's 2018 sales levels, and just reported net revenue increases of 125% compared to the year ago quarter. It's definitely going to be a push going forward and I'm seeing things that I like so far.

The stock is down a little bit, three percent year-to-date, but is up 13 percent over the past year. I'm not worried about a little market correction. I'm a happy shareholder and I think that anybody who does own Lululemon should be as well.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jena Greene owns shares of Lululemon Athletica. Jon Quast owns shares of Peloton Interactive and Planet Fitness. The Motley Fool owns shares of and recommends Amazon, Lululemon Athletica, Nike, Peloton Interactive, and Planet Fitness. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Lululemon Athletica Inc. Stock Quote
Lululemon Athletica Inc.
LULU
$329.80 (-0.57%) $-1.90
The Gap, Inc. Stock Quote
The Gap, Inc.
GPS
$11.06 (-3.66%) $0.42
Nautilus, Inc. Stock Quote
Nautilus, Inc.
NLS
$2.49 (-3.86%) $0.10
Planet Fitness, Inc. Stock Quote
Planet Fitness, Inc.
PLNT
$77.81 (-1.19%) $0.94
Peloton Interactive, Inc. Stock Quote
Peloton Interactive, Inc.
PTON
$12.94 (-5.48%) $0.75

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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