Over the past five years, shares of athleisure pioneer Lululemon (LULU -0.03%) have skyrocketed over 500%, easily crushing the 88% total return produced by the S&P 500 index. This past performance is no doubt impressive, but shareholders have a lot to be excited about looking ahead.
During a recent analyst day presentation, Lululemon revealed its five-year financial outlook, in which management officially set a target to double annual sales by fiscal 2026. At first, this forecast might seem like a lofty goal, but I believe that it is completely doable.
Let's take a closer look at this top apparel stock.
Focusing on key growth drivers and core strengths
Lululemon's strategy involves something called the Power of Three initiative. The first of these emphasizes product innovation. In the past, the company's women's segment, with the popular yoga pants, unsurprisingly drove gains. But by 2026, management wants to double the men's business. It's extremely probable, given that Lululemon reached its previous goal of doubling men's revenue by 2023 two years ahead of schedule.
The second pillar of the Power of Three strategy is improving the guest experience. While physical stores, of which Lululemon currently has 574 locations in 17 countries, are important for enhancing brand awareness, it's the e-commerce channel that will propel the business forward. By 2026, the leadership team wants to double digital sales.
Online revenue accounted for 49.3% of the total business in the fourth quarter of 2021. And thanks to pandemic-fueled demand, digital sales since Q4 2019 have climbed at a two-year compound annual rate of 50%.
Lastly, penetrating international markets is a major objective with the goal being to quadruple revenue outside North America by fiscal 2026. In the most recent fiscal year (ended Jan. 30), just 15% of Lululemon's overall sales were derived outside its home continent. Expect this proportion to increase.
"We remain early in our growth journey, with our strong product engine, proven ability to create enduring guest relationships, and significant runway in core, existing, and new markets," said CEO Calvin McDonald in the press release announcing the news.
Image source: Getty Images.
Lululemon's past points to a bright future
Lululemon's history demonstrates that management is simply just expecting the company to continue its proven success. Over the past five fiscal years, the business has increased sales at an annualized pace of 21.7%. Doubling revenue in the next five years would equate to a roughly 15% per-year gain, so the company's growth would actually decelerate going forward.
It's natural for businesses to slow down as they mature over time. However, because Lululemon only represents about 3% of the $200 billion global sports apparel market, with still a huge opportunity for expansion outside North America, it's likely that management exceeds the 2026 target of reaching $12.5 billion in revenue. Initiatives like launching into the footwear industry and a trade-in and resale program could further boost Lululemon's prospects further.
At greater scale, profitability is sure to rise as well. Lululemon's gross margin of 57.7% and operating margin of 22% in fiscal 2022 have been steadily expanding from what they were just a few years ago, demonstrating the scalability of the business model.
In fact, management expects growth of earnings per share to outpace revenue growth through 2026. Continuing to leverage investments made in research and development, driving more efficiency with corporate overhead and the store footprint, and leaning heavily on the digital channel translates to greater net income over time.
Additionally, Lululemon's brand is only getting stronger. According to Piper Sandler's spring 2022 Taking Stock With Teens survey, Lululemon is the third most popular clothing brand among the Gen-Z demographic.
Although Lululemon's current price-to-earnings ratio of 42 appears expensive at first glance, it might actually be reasonable given the quality of the company and its future growth prospects. Plus, the stock is down 34% off its all-time high in mid-November. Investors might want to take a look at this booming business.
