Product Diversification and E-commerce Can Drive Lululemon’s Growth In 2015

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Lululemon Athletica (NASDAQ: LULU) posted a 13% increase in revenue in fiscal 2014. The company has guided for a 10%-12% growth in fiscal 2015. [1] The company’s growth in the last quarter of 2014 was driven by unexpected factors such as its men’s and youth businesses and its e-commerce segment. In this note we take a closer look at the trends the company benefited from and how it should navigate those trends in the coming period to continue on its growth path.

We have a $61 estimate for Lululemon, which is about 6% below the current market price.

See our complete analysis for Lululemon

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Men’s Business

Since the company’s launch in 1998, its products have been most popular with women between the age of 18 and 44. However, in the fourth quarter of 2014, the retailer’s men’s brand began to gain momentum and posted a 16% year-over-year growth. [2] The men’s product has grown to 17% of total store assortment. [3] The main product that drove the segment’s growth in the quarter was the $128 per pair, new, comfortable, ABC Pants. This product lives up to the company’s image of providing fabric solutions that are versatile and functional but also chic. The pants are available in a number of modes: post sweat, pre-sweat, and no sweat, and hence suitable to any kind of situation.

In November, the company also opened its men’s only store in New York. [4] The store is staffed with tailors who can customize fit and lining, something that is quite unique among makers of technical fabrics. [4]  The retailer believes that the market size for its men’s products is around $1 billion, but did not divulge any target date by which it plans to achieve that revenue figure. [4]

Ivivva Business

In 2009, Lululemon launched its ivivva brand targeting girls between the ages of 6 and 15. The products available in this brand are made from the same material that is used to make its adult products, but come in brighter colors and lower prices, though these prices are still a lot higher than the yoga apparel sold by competitors such as Under Armour and Nike. In 2014, Lululemon opened 48 new stores of which 10 were Ivivva stores. [3] The new store openings and fresh products drove sales from the brand 51% higher compared to 2013’s sales. [3] The brand is fulfilling a similar function for the company that some of Under Armour’s products do for it. Under Armour designs special products for its younger customers, who are known to be highly loyal and devoted to the brand. This is a way in which the company is creating a captive market to which it can sell many more products in the feature and thus guarantee recurring revenue.

E-commerce

The company’s sales in the fourth quarter were driven by the company’s direct-to-consumer (DTC) segment. DTC sales were up 20% on the back of strong growth in e-commerce and other direct-to-consumer initiatives. [4] In contrast, sales from brick-and-mortar company-owned stores increased by only 5% on a year-on-year basis, which is still a respectable performance considering the appreciation of the U.S. dollar over the period. [4]

E-commerce contributed around 18% to the company’s top line and around 26% to its income. [3] Income from e-commerce operations grew by a significant 21%, a much faster rate than the company’s overall 1% income growth rate. [3] One factor which aided the rapid income growth was the launch of a mobile application that allowed consumers to order the company’s products from their smartphones. [3] Around 8% of the company’s online sales came from the mobile application in the fourth quarter of fiscal 2014. [3] For the company to keep growing in the future, especially as it begins to target newer customers and newer demographics, it is important that it keep increasing the reach of its business by driving e-commerce sales higher through the use of its mobile application and other innovative technologies.

See our complete analysis for Lululemon Athletica here

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Notes:
  1. Lululemon Athletica’s (LULU) CEO Laurent Potdevin On Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, March 2015 []
  2. Lululemon 10-K, SEC []
  3. Ref: 2 [] [] [] [] [] [] []
  4. Ref: 1 [] [] [] [] []