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Lululemon Crushes Earnings Estimate by 35% as Online Sales Surge 157%

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Lululemon (NASDAQ: LULU) announced a surprise earnings boost of 35% higher than the estimate as the online sales surged 157% during the height of the coronavirus pandemic.

Lululemon converts its stores to yoga studio after hours.

Lululemon reported Earnings per Share (EPS) of $0.74 vs. $0.55 estimates and revenue of $902.9 million vs. $842.5 million estimates for the second quarter ended on Aug 2, 2020.

The earnings boost was contributed by the explosive online sales growth and reopening of Lululemon’s stores in North America, Europe, and Asia-Pacific. 97% out of 506 company-operated stores were open as of Aug 2, 2020.

Lululemon’s revenue rose by 2% to $902.9 million from $883.4 million a year earlier as the online sales significantly offset the store sales during the lockdown periods.

Lululemon showed a remarkable performance, agility, and strong brand loyalty as the revenue increased from the previous year when most company-operated stores were shut down during the height of the coronavirus pandemic.

Most retailers were forced to file bankruptcy due to weak sales, the store shut down, and lack of online sales infrastructure.

Revenue Growth

Lululemon is the only activewear brand that shows a strong and sustainable growth year-over-year defeating its main competitors such as Nike, Under Armour, and GAP, which show a declining trend in the last four fiscal years.

Lululemon’s revenue grows 18% annually on average, while Nike, Under Armour, and Gap only grow 4%, 8%, and 1%, respectively.

Lululemon had successfully penetrated the fitness and activewear market segments and eroded Nike and Under Armour’s domination.

Lululemon has many devoted followers, which makes it the Apple of activewear products. There is always a long line-up in every Lululemon’s stores despite the expensive price point on its product lines.

Lululemon is remarkably successful in transforming fitness apparel and yoga pants into day-to-day activewear through successful marketing campaigns and strong customer acquisition.

Lululemon’s products are worn in gyms and yoga studios and shopping centers, restaurants, workplaces, schools, and more.

Profitability Growth

Lululemon is the most profitable company in the activewear market segment ahead of Nike and Under Armour. Lululemon’s profit grows 28% on average yearly while Nike and Under Armour only grow 5.75%, -1.52%, respectively.

Lululemon has strong profitability growth, which allows the company to finance its expansion organically without any debt in the last four fiscal years. Lululemon is a strong and profitable company with strong sales during the height of the coronavirus pandemic.

The trend for Lululemon’s activewear products demand continues to grow as more people work and study from home as they replace formal attires required for the workplace and classroom.

Profitability Growth2016201720182019Average
Lululemon (LULU)21.57%-4.84%60.34%35.10%28.04%
Nike (NKE)16.78%-42.53%87.48%-38.71%5.75%
Under Armour (UAA)17.90%-62.71%59.29%-20.56%-1.52%
GAP (GPS)1.69%-9.20%8.62%-17.46%-4.09%
Stock Valuation

Lululemon’s current stock valuation ranges from $362 – $452 per share using the Weighted Average Cost of Capital (WACC) of 6.17% – 7.24%. The range is based on a 3 – 5 years Beta of 1.18 and 0.96 with the annualized Alpha of 27% based on 5 years stock return performance.

The increasing Beta values show that the stock market influences Lululemon’s stock performance in general over time. The low Beta value indicated the initial Lululemon’s market entry into a niche yoga pants market.

The Beta value started to increase when Lululemon’s products entered the mainstream fitness and activewear markets and eroded Nike and Under Armour’s market shares.

Lululemon has a strong annualized Alpha of 27%, making it a good candidate for long-term portfolio holding. 27% Alpha means Lululemon outperformed the overall stock market by 27% at an 83% confidence interval annually.

Stock Market Response

Lululemon’s stock tumbled after the earnings announcement on Sep 8, 2020, due to lack of news coverage, massive market sell-off, and the company’s decision not providing an outlook for 2020.

There was strong momentum leading to the earnings announcement, but the sudden reversal of the market sell-off disrupted the momentum and negatively affected Lululemon’s stock.

It was the wrong timing for Lululemon as the company released earnings when Dow dropped 1000 points in a single day. Lululemon’s stock would have performed fantastically if the earnings announcement occurred 5-10 days before or after the massive market sell-off.

The momentum was strong, but it went in the wrong direction when the entire stock market was in a fire-sale situation.

The chart shows the 5 years stock return. Lululemon gained a 506% return exceeding Apple’s return at 304.89% and S&P 500’s at 65.73%, while Nike’s at 83.75%, Under Armour’s at -79.01%, and GAP’s at -38.04%.

The recent Lululemon’s stock decline was temporary as market sell-off’s systematic risk influenced the stock market.

Lululemon’s stock has a strong probability of reversing in a positive direction when the market started to understand its strong earnings performance, strong brand loyalty, and remarkable competitive advantage.

Full earnings news release

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Written by Leonardo Hadi, P.Eng.,MBA
Quantitative hedge fund investor and Professional Engineer, holding an MBA from the University of Illinois at Urbana-Champaign Profile

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