Crocs And Lululemon Have Seen Stock Swell 3x In Two Years, But Which Is A Better Bet Now?

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lululemon athletica

Lululemon’s stock (NASDAQ: LULU) has grown by 195% between the beginning of 2018 and 2020 – a handsome return for an investor by any count. Investors in Crocs’ stock (NASDAQ: CROX) fared even better with returns in excess of 230% over the same time period. But it is hard to believe that Crocs’ stock outperformed Lululemon’s – especially since Lululemon’s revenue growth for the 2017-2019 period stood at 50%, while Crocs’ revenue grew by 20%. Keeping in mind that Crocs’ stock has shrunk 36% year-to-date, while Lululemon stock added another 20%, doesn’t Crocs’ look like a buying opportunity?

Not quite. We believe that Lululemon continues to be the stronger investment, as we highlight in our dashboard Lululemon vs. Crocs: Does the price movement makes sense.

Lululemon’s profit margins (net income as a percentage of net revenues) are higher at 16.2% versus 9.7% for Crocs. Notably, both companies have witnessed a steady improvement in the margin figure over the last three years. Lululemon’s profit margin has jumped from 9.8% in 2017 to 16.2% in 2019, whereas Crocs’ margin figure has gone up from 1% to nearly 10% over the same timeframe. That said, Lululemon’s strong revenue and margin performance over recent years are reflected in its much higher P/E multiple of 56x (based on its current market price and FY’19 EPS), compared to Crocs’ P/E of around 15.7x now. Despite Lululemon’s P/E being at an all-time high, we believe that its stock can gain more in the long run.

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How Do The Core Businesses For Lululemon And Crocs Compare?

Lululemon derives a bulk of its revenues from the sale of healthy-lifestyle-inspired athletic apparel products and accessories. Lululemon has achieved unparalleled growth in the apparel industry in the last few years, with the company’s revenues growing by a stellar 50% over 2017-2019. Although the coronavirus outbreak will have a sizable impact on Lululemon’s revenues in FY20 due to lower discretionary spending, the adverse impact of store closures, and increased unemployment, we believe the demand for yoga and athleisure products will rebound as the outbreak of the virus subsides. Furthermore, Lululemon’s well-established digital business is helping to mitigate the impact of store closures on the company’s top-line.

On the other hand, Crocs primarily makes money by selling casual footwear products and accessories for all age groups. Crocs’ revenues grew by 20% over 2017-2019 led by strong growth in units sold and higher average selling prices. However, the impact of Covid-19 was evident from Crocs’ Q1 2020 results which saw its revenues shrink by 5% while total units sold fell by more than 7% as stores remain closed and consumer spending saw a meaningful decline. Nevertheless, as the situation inches towards normalcy, Crocs’ business will likely return to growth but it is unlikely to be as robust as that of Lululemon’s. LULU has a huge customer base and faces less competition in the athleisure space. On the other hand, Crocs faces stiff competition from the large, established players like Nike and Skechers as well as local players in the fragmented footwear market.

The final difference can be attributed to the retail footprint of these companies.  As of 2019, Lululemon was operating more than 490 stores while Crocs’ store count stood at 367. As the fears related to the virus subside, we believe Lululemon’s larger retail footprint will play a major role in its growth. To distill, we believe Lululemon stock is likely to outperform Crocs stock, if not near-term, at least in the medium- to long-run.

While Lululemon is going strong, the ongoing crisis has raised questions about the very survival of certain companies in the retail sector due to their precarious financial position. We find out whether Gap Can Survive The Covid-19 Recession in a separate analysis.


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