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Here's Why Lululemon Blew Away Expectations Last Quarter

By John Ballard – Sep 10, 2021 at 10:28AM

Key Points

  • Lululemon's fiscal Q2 revenue increased 61% year over year to reach $1.45 billion.
  • Its "science of feel" philosophy is fueling the emergence of an athletic apparel powerhouse.
  • The sportswear market just in North America is over 10 times bigger than Lululemon's current annual revenue.

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The brand's secret sauce for product development continues to deliver impressive growth.

Lululemon Athletica's (LULU 0.01%) fiscal second-quarter results confirm that the brand picking up where it left off before the pandemic. Revenue grew 61% year over year to $1.45 billion, which was well ahead of the consensus analyst estimate that called for $1.33 billion. Taking a look from a higher angle, Lululemon's revenue advanced 64% over the same quarter in 2019. 

Even management's forward guidance for fiscal Q3 is significantly ahead of expectations, with next quarter's forecast calling for revenue to come in between $1.4 billion to $1.43 billion, which is higher than the consensus estimate of $1.32 billion. The stock price is up 11.7% at the time of this writing, the day after the earnings release.

A person wearing Lululemon apparel while practicing yoga.

Lululemon seeks to hold its leadership in yoga with the new Instill Tight. Image source: Lululemon Athletica.

While stock prices often swing wildly based on beats and misses compared to Wall Street's estimates, Lululemon's recent performance shouldn't surprise any of its regular customers. Lululemon's "science of feel" philosophy in designing clothing continues to win over customers around the world and points the company toward a long runway of growth. 

Here's what Lululemon has been up to lately with product innovation that differentiates the brand in the intensely competitive athletic apparel industry.

Winning with product innovation

Lululemon is obsessed with how a person feels when wearing its products. For example, the reason men have flocked to the brand in recent years is largely due to the success of the ABC pant. They look like a regular pair of office pants, but they feel as good as wearing sweats. On its website, Lululemon says it took "years of research and development to perfect" this popular style. 

Innovating in the men's category has been a key growth initiative for the brand in recent years. Men's products made up only 25% of total revenue last quarter, but Lululemon is on pace to double its men's revenue this year from 2019 levels.

What's great from a business perspective is that customers are willing to pay up for comfort. The ABC pants sell for a rich price tag of $128 each and pants are typically Lululemon's highest-margin products. 

Since women's products make up two-thirds of the business, Lululemon is also filling out its assortment on that side to stay competitive. During the earnings call, CEO Calvin McDonald highlighted a recent launch that could be the company's next big growth driver in the women's category.

The AirSupport bra launched last quarter and took five years to research and develop. It builds on Lululemon's success with its Align collection, which has been successful for its "barely there" feel. AirSupport features Lululemon's Ultralu fabric and positions the company to expand into high-impact training activities.

Sports bras have not been an area of strength for Lululemon historically. The category currently makes up a mid-single-digit percentage of Lululemon's business, but management believes it can grow this category to the low- to mid-teens in the coming years.

Most importantly, Lululemon's unique design philosophy has led to considerable market share gains against the competition. The global sports apparel market has grown at single-digit percentage rates over the last decade, but Lululemon has consistently grown revenue at double-digit rates over that time span. 

Lululemon is in the early innings of global expansion

The pandemic accelerated the awareness of the importance of fitness, which should play into the hands of Lululemon for years to come. In fact, McDonald believes Lululemon's total addressable market (TAM) expanded because of this trend. Here's what he said on the fiscal second-quarter earnings call.

So, we are [in] early innings of our growth. That's why we see such balanced growth across markets, channels, and product categories. And the impact that COVID has had on TAM plays to the strengths and plays to our growth story and the opportunity that we see ahead for our brand.

To put a number on what McDonald is talking about, consider that the sportswear market in North America alone was valued at $83 billion in 2019. That is a massive opportunity all on its own compared to Lululemon's fiscal 2021 revenue guidance of approximately $6.2 billion. 

Those numbers help us visualize Lululemon's future growth runway, but readers should now have a better understanding of the qualitative aspects of what is driving demand for the product, and above all, a highly loyal customer base to the brand. In 2019, Lululemon reported it had a Net Promoter Score of 83 (on a scale of -100 to 100), which is far above the average retail score of 44.

Lululemon's unique approach to its assortment gives the brand differentiation in a crowded apparel market, which is clearly being validated by growing customer demand. All told, Lululemon is a great stock to hold in your nest egg.

John Ballard has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Lululemon Athletica. The Motley Fool has a disclosure policy.

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