Why Lululemon’s Direct-To-Consumer Segment Is Key To Its Growth

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Lululemon Athletica Inc. (NASDAQ: LULU), the Canadian athletic apparel retailer, is one of the fastest-growing apparel companies in the world. The company’s healthy lifestyle-inspired athletic apparel and accessories have helped the company achieve strong growth over the last few years. Moreover, this growth has been aided by new store-openings and a steady increase in comparable-store sales as well as e-commerce sales across the U.S. and Canada. While the company’s retail business has flourished, Lululemon’s Direct-To-Consumer (DTC) segment has been the single largest contributor to growth over recent years. Trefis highlights the importance of its DTC segment to Lululemon in an interactive dashboard, and also details why the segment will remain key to growth in Lululemon’s valuation over coming years.

 

What Is The Importance Of DTC Segment To Lululemon?

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#1 DTC Segment Contributes More Than 25% Of Lululemon’s Revenues

  • DTC segment has achieved robust growth in the last few years, with revenues more than doubling from $400 million in 2015 to roughly $860 million in FY 2018
  • This growth can be attributed to an increase in traffic on e-commerce websites, improved conversion rates and increased dollar value per transaction.
  • We expect DTC revenues to continue their growth trajectory – increasing at a rate of 23% to $1.05 billion in FY 2019.
  • With increased digitization and higher traffic on the company’s website and mobile apps, the contribution of digital sales to total revenue is expected to cross 28% in 2019.

 #2 Lululemon’s DTC Segment Has Outpaced Growth In Lululemon’s Total Revenues In Each Of The Last 3 Years

  • Lululemon has added $1.2 billion to total revenue since 2015 at an average annual rate of 17% while the DTC segment has added more than $450 million to Lululemon’s total revenue at an average annual rate of 29% – accounting for nearly 40% of the company’s incremental revenue growth.

 

#3 Moreover, Lululemon’s DTC Segment Has Continued To Grow At A Higher Pace Than That Of Competitors’

Additional details about how DTC segment revenues for Under Armour and Nike compare with Lululemon’s are available in our interactive dashboard.

 

#4 Finally, the DTC Segment Has Been Operating At A Higher Margin Too

  • As of 2018, the DTC segment’s operating margin was 41% – well above Lululemon’s total adjusted operating margin of  30%
  • This difference is primarily due to lower capital expenditure for this division.
  • As of 2018, Lululemon’s DTC business was responsible for less than 3% of the company’s total capital expenditure.

 

Conclusion

  • DTC is Lululemon’s fastest-growing division – accounting for nearly 40% of the company’s growth.
  • Additionally, the company has worked hard on improving its digital offerings over the past few years. The company has also concentrated on making the online experience as engaging and seamless as possible.
  • With strong digital marketing campaigns and special promotions, the company has managed to record consistent gains from its DTC business.
  • Going forward, we expect revenues from the DTC segment to grow multi-fold, with e-commerce becoming the largest revenue stream for Lululemon.

 

Starting with our forecast for Lululemon’s revenues as detailed above, we estimate the company’s adjusted EPS for full-year 2019 is to be around $4.63. Using this figure with our estimated forward P/E ratio of 45x, this works out to a price estimate of $209 for Lululemon’s stock

 

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