Lululemon used to be a niche player, now some think it could be the next Nike
For six years, between 2011 and 2017, Lululemon Athletica Inc.’s stock looked as if it was tapped out. The yogawear company was already an incredible success for investors, who backed it from its US$14 IPO in 2007, but further growth was a concern.
The top end of the US$40-US$65 range, within which it traded for the most part during that span, was looking like the proverbial ceiling for a company that was then seen as a niche retailer that predominantly appealed to one gender. When it wasn’t fielding concerns that its premier yoga pants were see-through, it was making news due to the departure of outspoken founder Chip Wilson.
Fast forward to the beginning of 2020, and the picture has changed dramatically.
It has become standard on Wall Street to hear Lululemon mentioned in the same breath as powerhouse brands such as Nike and Adidas
After aggressively pursuing the male demographic and expansion into Europe and China, the Vancouver-based company has seen its growth prospects reignite. Its stock price has followed suit, quadrupling to flirt with the US$250 per share level.
A Cowen analyst even recently suggested the retailer had a chance to become another Nike Inc., the world’s dominant athletic brand, something that once would have been laughable.
But UBS analyst Jay Sole said that it has become standard on Wall Street to hear Lululemon mentioned in the same breath as powerhouse brands such as Nike and Adidas AG, even if consumers haven’t made that leap yet.
“Brands like Nike and Adidas are great brands, global brands, but they’re thought of as men’s brands that make products for women,” he said. “Lululemon has the distinction of being a women’s brand that makes products for men. People doubted that they could really grow their men’s business but they have.”
While Nike is targeting female shoppers by rolling out sports bras, yoga pants and a sneaker campaign, Lululemon is doing the reverse, pushing its own line of jackets, jogging pants, polos and underwear for men. Taking a page out of Nike and Adidas’ books, they’ve even brought on former Superbowl MVP Nick Foles as an ambassador for the line.
An easier option was on the table — Wilson at one point launched a public campaign to attempt to pressure the company into acquiring Under Armour Inc., another upstart athletic brand that had struggles of its own — but Lululemon chose to introduce a men’s line organically. The move has already been a successful one, according to the company. Revenue brought in by men’s apparel grew 38 per cent during the retailer’s third quarter alone. On a yearly basis, Lululemon has said sales in menswear are on track to hit US$1 billion in 2020.
The expansion has worked, Sole said, because of its gradual rollout. Lululemon didn’t betray its core identity by immediately abandoning what made it popular. The appeal of the stores to women is actually helping to boost men’s sales, Sole said, as about half of the men’s products sold are being bought by women.
“If they were going to try to all of a sudden change their assortment to selling some yoga pants but half of it was going to men’s running clothes, it would seem really inauthentic,” Sole said.
“They’ve been very careful about how they’ve expanded the definition of their brand and what it stands for.”
Still, Lululemon is far from satisfied and is already looking to set the bar even higher. Chief executive Calvin McDonald unveiled a five-year plan in April that aims to double digital and men’s sales, hit annual low-double-digit growth in its core business and quadruple its international revenues for 2023.
Between Lululemon’s fourth quarter 2018 and its third quarter of 2019, the company opened 57 stores, bringing its worldwide total to 479.
We believe we are only scratching the surface of our potential within China and Asia
Lululemon CEO Calvin McDonald
During the company’s third-quarter earnings call, McDonald said Lululemon’s total revenue from international markets increased by 35 per cent and highlighted that the company opened a second store in Paris and entered Oslo for the first time.
As for China and Hong Kong, Lululemon already has 40 locations and outlined the potential for even more.
“We believe we are only scratching the surface of our potential within China and Asia overall,” McDonald said during the call.
Jane Hali, the CEO of investment research firm Jane Hali & Associates, said the global appeal of Lululemon stems from activewear becoming more fashionable. With demand driving its global growth, Lululemon’s potential is boundless, she said.
“The Chinese love the brand, the British love the brand … they’ve taken over London, they’re in Paris now and who would think that a Parisian way of looking would be active but the whole world is getting into wellness,” she said. “There’s no ceiling right now because of the growth potential in these countries, China being the biggest.
“China alone can (bring it into competition with Nike).”
While it already enjoyed a stellar 2019, Lululemon seems set to continue to build on its momentum this year. On Monday, it announced that it was raising financial guidance for its upcoming fourth quarter after better-than-expected sales. The stock ripped forward again, gaining an additional US$11 to move to US$245.18. Now worth close to US$32 billion, it still has ground to make up to Nike and Adidas, which has respective market caps of US$127 billion and $70 billion respectively.
The stock has been a favourite of R.N. Croft Financial Group chief investment officer Richard Croft for years.
Lululemon’s same-store sales continue to be solid, he said, while its presence in China is giving it a huge runway.
The company will have to beat expectations to pave the road for further upward movement, Croft said, although it has proven to be able to do that multiple times in the past.
Croft stopped, his train of thought interrupted.
“I just sold myself,” he said. “I may go buy it right now.”