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Why You're Smart to Buy Lululemon

By Neil Patel – Oct 2, 2021 at 9:18AM

Key Points

  • Lululemon has been a huge winner, and its market-beating days are likely far from over.
  • The brand displayed powerful momentum during the most recent quarter.
  • Management pursues a different distribution and marketing strategy than competitors, giving Lululemon an edge in the industry.

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This top athleisure brand can boost the performance of your portfolio.

Having pioneered the popular athleisure category, Lululemon (LULU -12.85%) has become a name synonymous with high-quality, comfortable, and aesthetically pleasing clothing. So, it's no surprise the stock has been a major winner too, crushing the S&P 500's performance over the past five years

LULU Chart

Data by YCharts.

But investors who are still on the sidelines have nothing to worry about. Thanks to its steady momentum and some key advantages, this leading apparel stock still has lots of room to run. Read on to find out why Lululemon still makes a solid investment today. 

Strong momentum

During the fiscal second quarter, Lululemon's revenue grew 61% year over year to $1.45 billion, and operating income jumped 134% to $291 million. The business was adversely affected in 2020 by temporary store closures due to the coronavirus pandemic. But Lululemon has since recovered as consumers seek out comfortable and stylish clothing to wear, not just at home but as they return to the office as well. 

Lululemon's original target market was women. However, its men's business is booming, registering annualized revenue growth of 31% over the past two years, outpacing the women's category during that period. And as part of its international expansion, Lululemon plans to open 35 to 40 new stores this fiscal year, and this push remains a huge focus for management. For all of fiscal 2020, just 14% of revenue came from outside North America. 

"This year, we will likely achieve the goal we set to double our men's business, and we remain on track to quadruple our international business by 2023, if not sooner," CEO Calvin McDonald said on the second-quarter earnings call. Since it can tap into new customer groups and new geographies, it's clear Lululemon's growth is far from over. Plus, the $500 million purchase of Mirror last year gives the company access to the burgeoning at-home fitness market. 

Management raised its full-year fiscal 2021 guidance, which now calls for sales and earnings to hit $6.23 billion and $7.21 per share at the midpoints of their respective ranges. The market was very pleased with the second-quarter results as shares popped more than 10% following the report. The business has a lot going for it, so it's not out of the question that Lululemon continues surprising the market, which will only propel the stock higher. 

Person standing outside wearing athletic clothing.

Image source: Getty Images.

Distinct advantages 

Lululemon's remarkable success can be attributed to two main factors.

First, the company sells its merchandise primarily on its own website or through its global footprint of 534 stores. Direct-to-consumer (e-commerce) revenue represented 41% of total sales in the most recent quarter, down from 61% in the year-ago period. This distribution strategy allows Lululemon to avoid costly markdowns, further supporting the strength of the brand with consumers. It's also why Lululemon has consistently produced a higher gross margin than bigger rivals like Nike. 

And when it comes to marketing, Lululemon doesn't pursue expensive endorsement deals with superstar athletes. Instead, it focuses on something called community-based marketing.

The company recruits ambassadors, usually fitness or yoga instructors, from communities where its stores are located. These ambassadors gain access to new product releases and help create valuable word-of-mouth advertising using a bottom-up, localized approach. It's clearly working wonders, as evidenced by the fact Lululemon has some of the highest sales-per-square-foot numbers in the retail industry. 

If you're worried that you might be late to the Lululemon party, think again. This fast-growing consumer brand is shaking things up in the crowded apparel market by doing things its own way. Buying the stock now could be a very smart move. 

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

Stocks Mentioned

Lululemon Athletica Stock Quote
Lululemon Athletica
LULU
$326.39 (-12.85%) $-48.12
Nike Stock Quote
Nike
NKE
$109.42 (-1.74%) $-1.94

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

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