Lululemon Athletica (NASDAQ: LULU) is a multinational athletic apparel company founded in 1998. In its early developmental years, Lululemon centred around yoga wear and yoga pants, but has since ventured into a versatile selection of activewear, lifestyle apparel and sports accessories for women and men alike. Lululemon itself is a pioneering and well-loved athleisure trend that combines athletic attire and casual wear.
While Lululemon has always bewildered shoppers with its quirky and enigmatic name, it has been gaining wild popularity over the years. Across yoga and pilates studios, one could easily sense the disproportionate representation of Lululemon apparel. This global penetration is remarkable especially since Lululemon is far from affordable as compared to its competitors like Nike and Adidas – a single piece of legging can cost up to US$148.
Lululemon IPO-ed on Nasdaq in July 2007, with a current stock price of US$431.91 and a market cap of US$53.82b. With Its stock price soaring by 453.97% over the past 5 years, find out below what makes Lululemon special, and the risks worth taking note of.
Lululemon’s fundamentals have remained generally strong even facing the Covid-19 setback, as compared to its previous years and also its competitors:
- Lululemon’s revenue increased by 10.62% from the fiscal year 2020(US$3.98b) to 2021(US$4.40b). This may not be as exceptional as the sportswear giant Nike’s YoY revenue growth of 19.08% from US$37.40b to US$44.54b, but is certainly much more desirable compared to Adidas, whose revenue fell by 6.06% from US$23.64b to US$19.84b.
- Lululemon’s average earnings growth was 24.2% per year over the past 4 years, falling short of Nike’s 35.7% but significantly exceeding Adidas’s mere 0.18%.
- Lululemon has an operating margin of 20.78%, higher than that of competitors Nike (15.68%) and Adidas (10.37%).
- Lululemon has a net profit margin of 14.96%, higher than that of competitors Nike (13.17%) and Adidas (7.35%).
Besides, Lululemon’s unique characteristics and business strategies also position it competitively in the sports apparel industry:
- Lululemon offers products of unparalleled quality and comfort, which distinguishes it from other retailers. It specialises in exclusive and original fabrics that are durable, breathable, lightweight and stretchable, as well as invests in cutting-edge machines and research & development. Coupled with its stringent quality control processes which testifies its mantra ‘to elevate the world from mediocrity to greatness’, Lululemon is set to win over the hearts of customers.
- Lululemon also never fails to impress customers with its agile diversification endeavours. First of all, the expansion into menswear allows Lululemon to compete for a bigger pie within a larger consumer base. Its nimble digital expansion was also timely in the wake of the global pandemic, as the firm ventured to establish virtual personal shopping assistants to provide tailored solutions for customers. Moreover, loads of other online initiatives were introduced for Lululemon to stay connected with consumers and bolster customer loyalty, such as ‘Community Carries On’, a virtual hub that offered free workout and mindfulness sessions with Lululemon’s ambassadors.
- Synergies gained from Lululemon’s growth strategies are promising to deliver further engines for the firm. The most recent and high-profile deal was Lululemon’s timely and wise acquisition of an at-home workout platform, Mirror, which was valued at US$5m. Lululemon was thus able to ride on the fad of at-home workouts during lockdowns.
- Something else that differentiates Lululemon from other apparel stores is its community-oriented marketing approach which centres around authentic experience and grass-root immersion. When customers purchase a piece of apparel from Lululemon, they are not merely paying for the product, but also for the opportunity to belong to the global Lululemon community, for the pristine brand image that is associated with a healthy and active lifestyle, and for the perception of high socio-economic status that comes with the pricy apparels. Lululemon has launched campaigns such as “SweatLife Festival” which help amass like-minded individuals who are passionate about yoga and active lifestyle, thus promoting customer engagement and satisfaction over the long term.
However, the risks of overvaluation do linger. Its P/E of 67.72x is significantly higher than that of the industry average of 19.2x. The same goes for its high P/B of 21x, in stark contrast with the industry average of 1.9x. With its PEG at 4.1x, it is natural to ponder whether the high share price reflects Lululemon’s intrinsic value.
Furthermore, there has been significant insider selling in the last 3 months, with 12382 shares sold by 3 individuals that amounted to US$4.9m.
Despite the risks, Lululemon is an industry pioneer in many ways and has real potential with its business strategies being constantly and agilely refined to cater to changing consumer preferences and social mainstreams. Though intangible, the one-of-a-kind brand image of Lululemon is definitely one of its competitive core assets and acts as a barrier to entry to fend off competition. Whether as a workout motivation or simply a much-needed self-assurance, we know that image-conscious customers easily buy into Lululemon’s signature and savvy narrative of active and healthy living. Customer retention is high, and it is easy to see why — who will choose to forgo the seamless quality and the appealing storyline that are not available elsewhere?
Disclaimer: This article solely represents Yvonne Fan’s personal opinion and is by no means a legitimate investment recommendation.