Cheap Lulu — Choosing the right Strategy

Good News: Lululemon stock could go higher

It is still a successful manufacturer of athletic clothing.

Important Points

Lululemon’s performance has been remarkable compared to the overall market over several years. This trend is likely not to stop.

It will be a great help to drive growth in both the men’s and international segments.

The stock might seem expensive at first, but Lululemon’s remarkable success justifies the high multiple.

Lululemon (NASDAQ:LULU), despite a stock market price that has increased nearly 600% in five years, might be tempted to believe its days of outperforming the market are over. I am here to tell that your assumption is probably wrong. Lululemon, an athletic apparel maker, still has a significant market opportunity. And despite what might seem like a high valuation at first, the company’s current trajectory is not bad.

Here are the reasons Lululemon could see its stock rise.

This is just the beginning.

Lululemon’s 12-month-to-date sales of $5.5 billion were approximately 3.2% in the global fitness and fashion review sports clothing market. Lululemon’s rapid growth makes it clear that the business is only a fraction of the entire industry. Sales and operating profit increased by 61% and 134% in the most recent quarter compared with the second quarter 2020.

Lululemon started out selling yoga pants for women. It has since grown to be a lifestyle brand that is accessible to everyone. Lululemon’s men’s segment is flourishing. In the last two years, the men’s revenue has increased by 31% per year, more than the 28% growth rate in women’s. On the Q2 earnings conference, Calvin McDonald, CEO of Lululemon, stated that the company will double its men’s business. This goal was established in 2019, and is expected to be met in 2023. Lululemon’s high consumer relevance speaks for itself.

Piper Sandler has provided some valuable data regarding the apparel market in its most recent Taking Stock With Teens survey. From 10,000 teens polled in 44 states, the No. Nike (NYSE.NKE) was identified as the No. 1 clothing brand by a large margin. Lululemon ranked fifth, with just 5% choosing it as their top apparel brand. This highlights the untapped potential Lululemon holds when it comes to younger customers. The company has achieved great success but hasn’t pursued a direct strategy to boost sales from teens. This could be a significant growth driver in the near future.

Person lying on the ground and stretching.

IMAGE SOURCE — GETTY IMAGES.

Lululemon’s potential for international expansion is huge, as 86% of fiscal 2020’s sales came from North America. The majority of the 45-55 new store openings this fiscal year (35-40) will be in foreign markets. The two-year average increase in international revenue is 43%. McDonald’s stated, in response to a question by an analyst on the conference call: «What’s most exciting is that balance of growth across international markets. It means they are all contributing significant growth. We aim to quadruple our international business by ’23.»

Lululemon has made it a priority to expand beyond the women’s section and outside the U.S. This is why it’s so easy to see the immense potential of this business.

What about the valuation?

Lululemon shares have risen in recent years, but they are still well below the S&P 500’s performance for the past 12 months. Investors may be reluctant to buy shares right now, however, due to the company’s 53-year forward price/earnings ratio (P/E), which is even greater than Nike’s 43.

Lululemon has seen a significant increase in quarterly revenue and profit over the past five year. Nike has seen these metrics rise by 35% and 50% respectively over the same time frame. Lululemon is a bull because Wall Street’s consensus earnings forecasts are consistently higher than Nike’s over the past three month. Lululemon can surprise the market by exceeding expectations. This only helps to boost the stock’s price.

Lululemon is a great company with a high valuation. This is due to its remarkable growth and bright future prospects. This is great news for current and future shareholders as the stock is likely to go higher.

Nike (NYSE.NKE) is the market leader when it comes to selling apparel for sports. The Oregon-based company is well-known for its global reach and strong brand recognition. Famous athletes have been endorsed by Nike. The company’s most recent quarter saw a revenue of $12.3 billion. And the stock has historically been a major winner, having risen nearly eightfold in the past decade.

Although a smaller competitor, it has key advantages over the sportswear company. Lululemon Athletica, NASDAQ:LULU) has roughly one-fifth of the market capitalization as its larger counterpart and can perform better than Nike in three areas.

Going direct to the consumer

Lululemon’s ecommerce sales experienced strong growth during the first quarter of fiscal 2021, even as brick-and-mortar opened up. Revenue grew 55% year-over year, with 44% of top line revenue coming from direct-to consumers. This is down from 54% when consumers remained at home.

Nike is far behind in digital sales, which accounted for just 35% (in fiscal 2021) of its total revenue. John Donahoe, Nike CEO and chairman, spoke out about his ultimate goal to reach 50% of its business through digital sales. He said that the company expects to have a mix of owned and partner businesses by 2025. lululemon align jogger, however, lululemon align jogger has achieved the same mix in the past year.

Lululemon’s brand image is enhanced by doing more direct to consumer business. Products stay at full-price longer. Lululemon’s margins are boosted by not selling products through third-party retail outlets.

Lululemon intends to open 35-40 international stores during fiscal 2021. This is in addition to the 45-55 global locations, which demonstrates the substantial growth opportunity outside of North America. The CEO Calvin McDonald spoke out confidently during the earnings call. «I can see a future when our international business will grow in size to equal our North America business,» he said.

Lululemon has made solid progress towards that goal. Fiscal 2020 saw 14% of the company’s revenue come from overseas. There is plenty of scope for this part of business to grow. The last quarter saw international sales grow by 125%, surpassing gains in North America by 82%.

Over half of Nike sales outside North America were in the three months to May 31. This should not surprise anyone as Nike is an undisputed global icon. Lululemon may have a smaller reach but it also has the potential to expand internationally.

Nike has been a major industry player for decades. The company combines fashion and sport, but Lululemon is still growing its global footprint. Growth-hungry investors need to be aware.

This article is the writer’s opinion. The official recommendation position of Motley Fool premium advisory may be different. We’re all different! We’re all motley!