Shares of athletic apparel designer and retailer Lululemon Athletica (LULU: Charts, News, Offers) jumped 20% in trading last Thursday after it announced surprising earnings that shattered all analysts’ expectations. Lululemon operates primarily in North America, and offers yoga-inspired apparel, as well as regular fitness apparel. The company operates 70 stores in the United States, 45 stores in Canada and nine franchise stores in Australia. The company’s stock now towers at all-time highs and is poised to break through to higher ground.
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A simple look at the numbers tells us why investors are so excited about this unfamiliar brand. Lululemon announced a 56% increase in net revenue, up to $175.8 million from $112.9 million the same period last year. Corporate-owned stores posted a 46% increase, from $98.1 million to $143.2 million last year, and same-store sales soared 29%. Gross profit rose 72% to $96.8 million, and net profit increase 55%, up from 50% the previous year. Operations income doubled, at 103% to $42.4 million, and net income increased 24%, compared to 19% last year. The company posted an EPS of 36 cents, far above the analysts’ average estimate of 25 cents. CEO Christine Day stated, “We are very pleased with our strong third quarter results. Our technical product continues to drive our top line growth, cementing our position as an innovative athletic wear company with yoga at our core.” The company also guided higher for the next quarter, estimating revenue between $210-$215 million, with an EPS of 46-48 cents.
The company’s target demographic consists of high-income, trendy adults, hence its focus on yoga, and its apparel is often priced at a high premium, which has allowed its gross margins to stay near 50%. Its stores tend to be small, and when combined with high prices, allows for these high margins. This strategy keeps it ahead of many of its industry peers, such as Talbots (TLB: Charts, News, Offers), which focus on massive stores and slim margins. Lululemon’s stores are located in urban shopping districts, malls, high-end lifestyle centers and yoga studios. The company has historically had one of the highest sales per square foot figures in retail, with a peak average of $1,700 of sales per square foot. This is compared to an industry average of $300-$500 of sales per square foot among peers which include Abercrombie & Fitch (ANF: Charts, News, Offers) and GAP (GPS: Charts, News, Offers). Despite the economic crises of the past two years, the company has continued expanding with more stores to increase its sales are brand awareness. The company’s shirts average $50-$60, and cater to a class less affected by macroeconomic downturns. Lululemon is an unfamiliar brand to many investors, due to the fact that it spends very little on television and print advertising. Instead, the company builds strong corporate relationships with yoga studios and gyms to achieve a more personal touch to its promotion, and relies heavily on word of mouth advertising.
Going forward, Lululemon will likely concentrate its efforts outside major urban areas, since its core customer group is centered around large cities and trendy lifestyles, in places such as Los Angeles, Seattle, New York, Toronto and Vancouver. Its e-commerce initiative, which began in late 2009, is an effort to use the Internet to reach untapped markets, and currently makes up 6-7% of the company’s overall sales. It is estimated that this figure will reach 10% in the near future. Relying on e-commerce has been a highly successful move for many clothing and accessory retailers, which have seen e-commerce sales rise while brick-and-mortar store sales have fallen. With the expansion of mobile networks and an increased adoption rate of smartphones, online retailing is seen as a hugely lucrative market. In addition, Lululemon has little direct competition, as there are few specialty retailers focusing on premium yoga apparel with its current market clout, and thus has a comfortable operating niche.
The stock currently trades with a high forward P/E of 44.48, but it is to be expected with the high expectations it faces. If past numbers are any indication, however, this company could very well become an athletic force to be reckoned with.
Other News About LULU
Jim Cramer is highly bullish on Lululemon.
Online sales have Lululemon clicking
Lululemon’s e-commerce initiative pays off.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
