By Sarah Ryu
Lululemon Athletica Inc (NASDAQ:LULU)
Summary
Lululemon Athletica Inc (“Lululemon”) is a technical athletic apparel brand that offers a variety of products, from fitness clothing and accessories to yoga classes. Despite its competition against larger wholesalers and sportswear companies, Lululemon has built its image as a “lifestyle” brand and a loyal consumer base by personally connecting with customers through ambassador programs and free yoga classes. With 515 stores in 17 countries worldwide, the brand’s continuous international expansion, especially in China and Europe, has led international sales to grow 45% in revenue just last quarter. Lululemon generates $4.07 billion in revenue and has a market capitalization of approximately $45.36 billion.
Thesis
As of December 31st 2020, Lululemon is trading at $350.78 per share, up 51.41% on the year. Due to Covid-19, the sportswear market faced a big drop in sales in physical stores, yet Lululemon fared relatively better than its competitors like Nike. Compared to the third quarter of fiscal 2019, net revenue rose 22%, primarily due to its shift to e-commerce. While comparable store sales decreased 17%, direct to consumer (DTC) revenue increased 94% (accounting for 42.8% of total revenue at the end of Q3). Lockdowns and work from home (WFH) culture have favored this segment of the retail market, proving to be the silver lining during the pandemic. As more competitors enter this market with the surge in athleisure consumption, Lululemon looks toward innovation and various expansion opportunities to differentiate itself.
Opportunities
While Lululemon’s revenue is highly concentrated in the United States and Canada, comprising 68.5% and 16.0% of total revenue, respectively, revenues outside of North America represent 15.5% of total revenue. Though the brand is still in the early stages of international expansion, it is on track to executing its five-year growth plan of quadrupling international revenue ($1.44B by 2023). Recent Q3 results show that international revenue grew 44.6% (at a 5 year CAGR of 38.0%). On a broader scale, the global sportswear market reached $181B in revenue in 2019 and is expected to reach $208B by 2025, indicating a continued traction in this market. The brand is eyeing China and Europe as their next key drivers in revenue in the coming years, and just during fiscal 2020, Lululemon has opened eight new stores in China (515 stores open as of November 2020).
In addition, Lululemon has implemented several initiatives to be at the forefront of product expansion and innovation. On July 7, 2020, the company acquired Mirror, an interactive fitness platform featuring live and on-demand classes, for $500M. As the brand continues to integrate Mirror within its ecosystem, Mirror is expected to generate $150M in revenue in fiscal 2020. By 2023, Mirror could expect to reach 600,000 subscribers and $700M in revenue.. The booming growth of this interactive fitness market is expected to grow at a 32.6% CAGR and is a hopeful indicator that Mirror also becomes a promising channel of potential returns. Competitors like Peloton, whose revenue grew to 232% year over year in the previous quarter, greatly benefited from the pandemic and surge in at-home fitness demands.
Lululemon’s expansion of sizes and men’s products have also strengthened its business amid the pandemic. Offering more sizes played a role in the increase of 22% in sales of women’s clothes last quarter, as the brand was able to attract a broader set of customers. Revenue from men’s apparel rose 38% in the last quarter, and the brand’s goal is to double the size of men’s revenues by 2023. Just last year, men’s products made up 21% of Lululemon’s sales. As WFH continues and demand for athleisure rises, Lululemon’s acceleration of the men’s division will help the brand achieve its goal. Lululemon is also looking to step into the footwear market and launch its first collection in early 2022, increasing revenue streams in the long-run.
Financials
Lululemon’s current EV/EBITDA = 37.8x
| Company | EV/EBITDA |
| Nike | 37.4x |
| Adidas | 28.1x |
| Gap | 6.3x |
| Under Armour | 35.6x |
| Puma | 31.8x |
| Nordstrom | 24.7x |
| Peloton | 184.8 |
| Median | 27.3x |
| 2020 (LTM) | 2021E
+14% |
2022E
+14% |
2023 E
+14% |
2024 E
+12% |
2025 E
+10% |
|
| Revenue | 4.07B | 4.67B | 5.29B | 5.98B | 6.70B | 7.37B |
+ $450m for revenue of non-growth-pillar related business lines.
= $7820 total 2025 estimated revenues
@25.5% EBITDA margin (up from 23% in 2020)
= $1.99B EBITDA
@ 27x EV/EBITDA
=$54B EV
= $52B market cap
= $400/share [~30% further upside]
Risks and Competitors
As Lululemon is in a large, fast-growing market, it will be increasingly difficult to defend its market share against competitors like Nike, Athleta by Gap, Target, and others. Many of these new entrants are already market leaders in the retail space and their scale allows them to quickly go to market and leverage their large customer base. A month ago, even Kohl’s announced that they would be starting a new brand to compete in the athleisure market.
Such brands have the greater advantage of having longer operating histories, broader supply chains, extensive customer bases, and greater brand recognition. This is a significant risk for Lululemon, as it aims to increase the number of worldwide stores and quadruple international revenues. If customers in countries like Europe and China prefer to purchase domestic brands or the large apparel companies, it would prove more difficult to overcome the long presence and reputation of those sellers.
Along with the ongoing impact of Covid-19, the acquisition of Mirror has incurred significant costs for the brand and may limit its operating flexibility, if the potential benefits and returns are not fully realized. Not only does the brand need to attract and maintain subscribers to MIRROR, but it must also provide engaging classes, innovative technology, and assurance of data privacy in order to grow the business and level of subscriptions. If such expectations aren’t reached, Lululemon may run the risk of failing to reach the level of profitability. With other in-home fitness platforms, like Peloton and Tonal, Lululemon will have to find ways for Mirror to differentiate itself as a brand and its services.
Internally, Lululemon should be wary of losing their brand identity as it launches many products and services too quickly. While being a brand for everyone can serve a wider audience, this may not sit well with the existing customer base, especially for a company that has built its brand on high-end utility wear. Gap had similarly failed in efforts and has taken steps back, cutting newer product lines and focusing on customer needs. By attempting to appeal to customers of all ages, races, and sizes in the early 2000s, the brand had lost its steam and identity, being called too “basic” to consumer’s tastes.
Conclusion
My overall recommendation is to buy Lululemon. Lululemon’s resilience during the pandemic and striking e-commerce sales has put the company in a better position than its competitors that faced greater losses. Total revenue significantly rose 22% year over year in the fiscal third quarter, compared to the mere 2% in the previous quarter. The potential profitability of the recent acquisition of Mirror and increase in revenue streams (international and menswear) will allow the brand to increase its dominance in the market share. In an industry growing at a CAGR of 5.1% with a positive outlook for athleisure demand, these long-term growth and expansion opportunities make the stock an attractive buy.
https://www.fool.com/investing/2019/05/02/lululemon-growth-plan-double-quadruple-sales.aspx