Lululemon Can Ride This Wave To Get The Stock Out Of Its Two-Year Slump

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LULU: lululemon athletica logo
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lululemon athletica

There was good news for investors when Lululemon Athletica (NASDAQ:LULU) announced its last set of results for fiscal 2014. The company reported a 13% increase in revenue in fiscal 2014 and guided for 10%-12% growth in fiscal 2015. [1]  Growth in the last quarter of 2014 was driven by unexpected growth in its men’s and youth businesses as well as growth in the 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 $57 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 ages of 18 and 44. However, in the fourth quarter of 2014, the retailer’s men’s business began to gain momentum and posted 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 during the quarter was the $128 per pair, new, comfortable, ABC pants. ABC, which stands for Anti-Ball-Crushing, is a product that lives up to the company’s image of providing fabric solutions that are versatile and functional, but also chic. It is a new kind of yoga pant that, like the $98 yoga pants it sells for women, could prove to be incredibly popular with millennials. The pants have attracted much attention and seem to be generating the sort of positive buzz the company needed after a string of PR disasters in 2013. Men still represent a new, untapped market for Lululemon and since many are still unfamiliar with the brand, this gives the company plenty of opportunity to redefine itself. The success of the ABC pants gives at least some evidence that the company can meet their demand as successfully as that of women, and the $128 price tag will help the company raise its margins as an increasing penetration of the pants in the sales mix will push the average unit price of products sold by the company higher.

Store Expansion

In November 2014, 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] In the earnings call, Lululemon’s CEO Laurent Potdevin also indicated that one of the company’s near term targets was increasing the size of its stores in order to accommodate a greater selection of men’s clothing. This could be a signal that more men’s products are on the horizon.

One example given by Potdevin was the remodeling of a location in Vancouver. The store size was increased by 50%, which led to a 50% overall increase in same store sales and a 90% increase in men’s sales in a span of just six months. The company expects a similar boost in sales from other store remodels in the future. However, there is a caveat here. These investments could weigh on the profits in the near term; but, if the company’s track record with the women’s business is anything to go by, they should come off well in the long term.

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 [] [] []