Equity Dive: Lululemon Accelerates Sales During Athleisure Boom
10th September 2021
Lululemon stock (LULU) is up over 10% after the company boosted its outlook for the year and reported sales that outpaced analyst expectations. The luxury athleisure company is capitalizing on the prolonged work-from-home period. To this point, LULU has trailed the S&P 500’s returns YTD.
Overview
- Lululemon Athletica is a designer, distributor, and retailer of healthy lifestyle-inspired athletic apparel and accessories.
- The apparel and accessories are marketed under the lululemon brand including items like pants, shorts, tops, and jackets designed for athletic activities such as yoga, running, and training.
- During the second quarter of 2020, LULU acquired Curiouser Products which does business as MIRROR.
- MIRROR is an in-home fitness company with an interactive workout platform featuring live and on-demand classes.
- Lululemon primarily operates through two channels: company-operated stores and direct to consumer.
- In 2020, due to the pandemic, 52% of sales were DTC compared to 29% of sales in 2019.
Q2 Earnings Highlights
Note: Most retail locations were open in the first two-quarters of FY2021, but certain locations were temporarily closed based on government guidance in some markets.
- Total net revenue: $1.5 billion, a 61% YoY increase off of peak-pandemic comparables.
- Net revenue increased by a 2-year CAGR of 28%.
- Company-operated store revenue: $695.1 million (47.9% of total revenue).
- Store revenue increased 9% on a 2-year CAGR basis.
- Total company-operated stores: 534 stores at the end of Q2 2021 versus 506 at the end of Q2 2020.
- E-commerce revenue: $597.4 million (41.2% of total revenue).
- E-commerce revenue increased 66% on a 2-year CAGR basis.
- Gross profit was $842.7 million, 58.1% of revenue (up 390 basis points YoY).
Valuation
- At its current market price of $420 per share, LULU has an enterprise value of ~$53.5 billion.
- Even with raised full-year guidance, LULU is trading at ~8.5x forward sales and ~34x forward EBITDA.
I generally don’t like investing in apparel brands because of the capital-intensive nature of their businesses, however, Lululemon has been expanding its DTC business as a percentage of sales, but a large portion of this business will rely on physical stores moving forward.
One wild card for LULU is the acquisition of MIRROR. The MIRROR segment operates on Peloton-like hardware + connected fitness subscriptions.
It’s a great brand with strong growth, but a 34x forward EBITDA valuation doesn’t screen particularly attractively but note that with more work, there could be an interesting story under the hood.
