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4 Reasons Lululemon Stock Could Rise Even Higher

By Daniel Sparks – Sep 16, 2021 at 7:46PM

Key Points

  • Lululemon's revenue was $1.45 billion in fiscal Q2, crushing analysts' average estimate of $1.34 billion.
  • Management believes the company is still early in its growth story.
  • With strong operating leverage and rapid revenue growth, the athletic apparel specialist's bottom line is soaring.

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Think you're too late to invest in this growth stock? Think again.

Shares of Lululemon Athletica (LULU 0.17%) are trading around all-time highs recently, up an impressive 35% this year. A portion of this gain was fueled by the athletic apparel company's earnings report last week, which featured revenue and non-GAAP (adjusted) earnings per share that blew past analyst estimates.

Despite the growth stock's outperformance recently, there's a handful of reasons to believe shares could be significantly higher five years from now. Here's a close look at why Lululemon's growth story is likely far from over.

A woman wearing athletic apparel while working from home.

Image source: Getty Images.

1. The pandemic boosted Lululemon's addressable market

One of the reasons for Lululemon's strong business results recently is accelerated adoption of quality fitness clothing and athleisure overall as more people have been working from home and as workplaces are becoming more flexible.

"The pandemic ... accelerated some of the guest behaviors that play to the strength of our brand," explained Lululemon CEO Calvin McDonald on the company's fiscal second-quarter earnings call. McDonald went on to list consumers' growing appreciation for general fitness, overall wellness, lifestyle, and functional apparel.

Grand View Research estimates the global athleisure market is valued at nearly $300 billion. Lululemon's $5.5 billion in trailing-12-month revenue is substantial -- but is still small relative to the overall market.

2. Lululemon is growing incredibly fast

Lululemon's soaring revenue shows how consumers are choosing Lululemon's products in droves. Its top line grew 61% year over year in its most recent quarter. 

"We ... continue to see our brand gaining market share across categories -- men's and women's," said McDonald on the earnings call.

3. Expanding profit margins

Not only is Lululemon's revenue growing rapidly, but its bottom line is soaring thanks to widening profit margins. Lululemon's gross profit margin was 58.1% in fiscal Q2. This is up 390 basis points from the year-ago quarter. Meanwhile, Lululemon's operating margin increased 630 basis points to 20.1%.

The net result of rapid revenue growth and expanding margins was net income of $208 million -- up from $87 million in the year-ago period.

4. Lululemon is repurchasing shares

Another likely boon for the stock is the company's strong financial position and management's capital allocation decisions. Thanks to a healthy balance sheet, Lululemon is able to repurchase shares -- a move that highlights management's confidence in the stock's long-term potential. In addition, share repurchases ultimately increase shareholders' ownership in the company and can increase the intrinsic value of a stock over time.

Lululemon repurchased a half-million shares during fiscal Q2 alone, spending about $171 million and buying shares for an average price of $338.41.

Overall, it's clear that Lululemon's business is benefiting from some incredible momentum -- both in terms of demand and business economics. This business strength should help the company live up to the stock's pricey valuation and earn investors a solid return over the long haul.

Of course, every investment has its risks. Investors will have to watch closely to see if Lululemon can maintain its pricing power and continue gaining market share as competition heats up. Given how the company has demonstrated robust consumer appetite for high-end athletic apparel that emphasizes feel, comfort, and functionality, you can bet competition will be coming after Lululemon.

Daniel Sparks 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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