Lululemon Athletica (LULU 0.80%) delivered a fantastic earnings report recently, with revenue growth accelerating to 32% year over year for the fiscal first quarter ending May 1. With supply chain issues and inflation remaining top concerns for Wall Street in 2022, Lululemon's better-than-expected performance was a welcome surprise.
Lululemon's brand is on fire. During the earnings call with analysts, CEO Calvin McDonald credited recent growth to brand strength while also discussing how the company is meeting the needs of customers with new products, saying, "We are supporting our guests in their sweat activities, and that is driving the momentum and growth of the business during the pandemic and post and continues to be the biggest fuel of our momentum."
The share price has fallen 21.4% year to date, which is in line with the performance of the Nasdaq Composite index. A good sign of when to "buy the dip" on a stock is when the company's underlying business continues to post strong growth but the stock falls for no other reason than everything else is falling too.
Lululemon is seeing success expanding into new product categories. During the recent quarter, the company rolled out a new assortment for golf and tennis, which McDonald noted performed well. But the headliner was the strong initial sales of Lululemon's new performance-based footwear, where the company could be looking at a multibillion-dollar opportunity.
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Demand far exceeding expectations
Lululemon launched its first-ever women's running shoe Blissfeel in March. The demand was a lot more than management anticipated, which has created problems in keeping the shoes in stock. As a result, McDonald noted the company will have to play catch-up with inventory for the rest of the year. The problem seems to have been made worse by Blissfeel being chosen as the best women's shoe by Runner's World for 2022.
The success of the new shoe line shows that Lululemon can capture a piece of the $48 billion footwear market. This stretches its addressable market opportunity, where it still has room to open new stores worldwide to grow apparel sales and reach new customers.
Lululemon will have to differentiate itself, because footwear is a crowded field already dominated by established brands. Nike is the leader, generating $21 billion in footwear sales during the nine-month period ending Feb. 28. There are many other brands jockeying for a piece of the pie.
But investors shouldn't make the mistake of assuming that only a few brands will control 100% share of the market. Footwear is a growing market. Total athletic footwear sales globally increased from $35 billion in 2012 to $48 billion in 2021, according to Statista, and sales are expected to reach $76 billion by 2025.
Lululemon believes it has a key competitive advantage against established players based on its design approach. As Chief Product Officer Sun Choe explained in the March press release announcing the new shoe line, "We intentionally started with women first because we saw an opportunity to solve for the fact that, more often than not, performance shoes are designed for men and then adapted for women."
Lululemon has already launched its second shoe style, Restfeel. It's on schedule to release two more styles, Chargefeel and Strongfeel, later this year. As noted by their names, Lululemon is applying its Science of Feel design philosophy to footwear, which has unquestionably served the company well, delivering phenomenal growth in apparel over the last 20 years.
Most importantly, investors should bank on the psychology of brand power to push Lululemon's footwear sales higher over time. Some customers are likely buying Blissfeel for no other reason than it has Lululemon's name on it. With the company already making serious headway expanding its brand internationally, where revenue outside of North America grew 29% year over year last quarter, Lululemon has already crossed a tipping point in its long-term growth trajectory.
Lululemon's brand is resonating across cultural boundaries. It appears destined to become one of the next great brands in retail, which is why investors should consider buying the dip.
