Lululemon Athletica (LULU) — the designer, distributor, and retailer of healthy lifestyle inspired athletic apparel and accessories — possesses a leadership position in yoga and workout clothing in North America, notes Doug Gerlach, editor of Investor Advisory Service.
It has a very loyal customer base that can be attributed in part to its positioning as an authentic, purpose-driven brand, and it deserves a substantial amount of credit for spurring the athleisure trend that has been a powerful driver of the company’s growth.
At the end of fiscal 2019 Lululemon had 491 stores globally, up 12% from the prior year, while nearly 30% of the company’s sales came from its website and mobile apps. Digital possesses superior margins and continues to grow more rapidly than the rest of the business, up 33% last year versus 21% overall sales growth.
Management has outlined expectations for digital to continue to outpace total revenue growth and more than double over the five-year period ended 2023. Along with strong growth in its digital channels, Lululemon’s same-store sales excluding digital have also been good, up 10% in 2019.
Though women’s yoga pants serve as Lululemon’s core product and leading customer acquisition vehicle. Its men’s category grew 34% in 2019, and management anticipates 20% average annualized growth in men’s products through 2023.
Of course COVID-19 presents a significant risk for Lululemon. Management declined to provide guidance for 2020 given the uncertainty surrounding the virus.
Lululemon is relatively well positioned given its strong digital channel and lower inventory risk, thanks to a less seasonal assortment with many of its core styles relevant year-round.
Projecting 18% EPS growth over the next five years and applying a high P/E of 35, we get a potential high price of 395. Applying a low P/E of 24 to last fiscal year’s EPS of 4.93 yields a low price of $118. Therefore, we model an upside/downside ratio of 3.4 to 1 and a projected high total return of nearly 17% annually.
