The company is known for its yoga pants. But Lululemon Athletica (LULU -1.72%) has evolved into a broader athletic apparel company over the years. Its broadening appeal is likely part of the reason the stock has performed so well since going public.
Over the last decade, Lululemon stock has increased about 400%, outpacing rival athletic apparel companies including Nike (NKE -0.30%) and Adidas during this time. This means that if you'd invested $1,000 in Lululemon stock in April 2013, you'd have almost $5,000 now.
Here's why Lululemon has been such a great stock -- and what investors can expect going forward.
Why Lululemon stock has gone up
Normally there are multiple contributing factors when a stock performs well. However, in the case of Lululemon, I attribute its stellar performance to a single factor: Revenue growth.
In its fiscal 2012 (which ended Feb. 3, 2013), Lululemon generated net revenue of almost $1.4 billion. By comparison, the company generated more than $8.1 billion in net revenue in its fiscal 2022 (which ended on Jan. 29, 2023).
To a lesser extent, share repurchases have also boosted Lululemon stock. At the end of its fiscal 2012, the company had almost 146 million diluted shares outstanding. But as of the end of its fiscal 2022, it had about 128 million. The small reduction in the share count makes each remaining share more valuable, so it's played a small part in the 400% gain of Lululemon stock.
Here's what hasn't boosted Lululemon stock: Improved profitability or valuation.
From fiscal 2012 through fiscal 2022, Lululemon's gross profit margin was flat. The company's operating margin was actually down. The end result is that Lululemon has grown revenue faster than profits -- usually investors hope it's the other way around.
LULU Revenue (TTM) data by YCharts
Finally, Lululemon stock had a price-to-sales (P/S) ratio of about 8 at the start of 2013. Today, it trades at a P/S of less than 6. In other words, the stock is cheaper today from a valuation perspective, preventing shares from going up as much as they would have if the valuation had stayed the same.
What is fueling revenue growth?
As mentioned, revenue growth is the biggest reason Lululemon stock is up. The growth resulted from the intentional expansion of the business.
For example, in its fiscal 2012, only 5% of Lululemon's revenue came from outside of North America. In its fiscal 2022, 16% of revenue came from outside of North America. Therefore, international expansion is succeeding.
Lululemon has also opened many new stores, going from 211 company-owned stores at the start of 2013 to 655 stores now. Many of these new stores were in international markets.
Finally, Lululemon has entered new product categories as well over the years. In 2022, this included entering the shoe category.
Image source: Getty Images.
Will Lululemon stock go up more?
Looking at Nike's financials could be helpful when evaluating Lululemon's potential. Through the first three quarters of Nike's fiscal 2023, only 44% of Nike brand revenue came from North America. Moreover, 67% of Nike brand revenue has come from footwear sales during this time.
In other words, over half of Nike's revenue comes from footwear sales in international markets. This clearly shows that Lululemon has an ongoing revenue growth opportunity by expanding in these areas.
Indeed, this is the plan from Lululemon's management. In early 2022, it laid out its plan to quadruple its international business by the end of 2026. Management doesn't explicitly lay out growth projections for its shoe business during this timeframe. But its undoubtedly a factor.
Nike shows that it's possible to derive the majority of revenue from outside North America, giving reasonable optimism that Lululemon can expand outside North America as well. This international expansion will play a big part in getting the company to management's goal of $12.5 billion in annual revenue in 2026 -- 54% higher than its revenue in fiscal 2022.
Buy Lululemon stock?
I believe it's reasonable to expect the valuation of Lululemon stock to continue to decline over time. Achieving Nike's valuation would result in perhaps a 30% valuation haircut.
LULU PS Ratio data by YCharts
That said, even if Lululemon's valuation drops (not a guarantee), its revenue growth plans appear achievable, which will provide a boost.
Moreover, Lululemon's management hopes to get more profitable. Granted, it hasn't demonstrated consistent success in this area, so I take that guidance with a grain of salt. But it would provide additional upside if achieved.
For these reasons, I believe it's likely that Lululemon stock will head higher from here. And if things go really well, it may even be a candidate for outperforming the market average.
