There's a clear reason why Lululemon Athletica (LULU +0.96%) is attracting attention right now. In an environment of rising inflation and supply chain troubles, retail isn't the easiest business. But Lululemon is showing it can handle the headwinds -- and grow.
In fact, the seller of yoga-inspired apparel this year has even reached some targets of its Power of Three growth plan early. And it's launched an all-new plan to take it to the next level. But Lululemon shares haven't climbed along with this good news. They've declined more than 25% so far this year. Let's take a closer look at this stock everyone is talking about -- and find out whether its time to buy.
Power of Three
Lululemon launched its Power of Three plan back in 2019. The goals included doubling sales of the men's line and sales through the digital platform, and quadrupling the international sales. It met the first two goals early. And its on the way to quadrupling internationally.
Now a reasonable question is: How could Lululemon do this in the current economic climate? It has to do with the business model and brand strength. Lululemon CEO Calvin McDonald says the company is "predominantly a full-price business." This means Lululemon doesn't often mark down its merchandise.
Importantly, this hasn't impacted sales -- even in a difficult environment. And Lululemon's products aren't cheap. For example, the best-selling Align high-rise pant ranges from $98 to $118. But Lululemon has built an audience with sustained buying power. In the second quarter, transactions by existing customers climbed in the high teens. And transactions by new customers increased by more than 20%.
There are a couple of reasons for this loyalty. First, the product. Lululemon's materials offer features such as weightlessness, a soft feel, and limited seams. The company also is constantly innovating in the areas of clothing, footwear, and accessories. The high-rise training tight, for example, features four-way stretch fabric for ease of movement.
NASDAQ: LULU
Key Data Points
Sweatlife community
Next, Lululemon offers its fans free access to its Sweatlife online community. This features inspirational stories and access to tips and various yoga and exercise classes. This was a big plus during the coronavirus lockdowns. It kept fans connected with the brand. And just recently, Lululemon launched a membership program. You can choose the free tier or pay a monthly charge for access to more benefits and activities.
Lululemon's efforts have reaped rewards when it comes to earnings. Profit, sales, and return on invested capital have been on the rise over time.
LULU Revenue (Annual) data by YCharts
And in the second quarter, Lululemon's net revenue, comparable sales, and gross profit all rose in the double digits.
The company is confident about its future. The goal of the new five-year growth plan is to double revenue to $12.5 billion by 2026. And to do this, Lululemon aims to once again double men's line revenue, double digital revenue, and quadruple its international business.
What does this mean for investors?
First, it's important to say Lululemon isn't completely immune to the current economic context. Gross margin in the second quarter decreased 160 basis points to 56.5%. Like other retailers, Lululemon has faced higher transport costs and supply chain disturbances. And that's hurt margin.
That said, as we can see from the rest of the earnings numbers, Lululemon is successfully managing these difficult times. So, its reasonable to be optimistic about the company's latest growth plan. Current shareholders probably will benefit by holding on as Lululemon progresses.
As for buying the shares or adding to holdings, now could be the right moment. This year's decline leaves Lululemon trading at 33 times trailing 12-month earnings. That's around its lowest over the past five years. At the same time, revenue has continued to rise. The stock looks reasonably price considering today's earnings and future prospects.
Lululemon's growth plan could offer catalysts for share price performance over the next few years. If the company is successful, investors may reap the rewards. All of this means everyone might continue to talk about Lululemon for quite a while.
