In this company overview we will analyse the Canadian company Lululemon which has been operating in the clothing industry since 1998.
Our objectives are to understand the brick-and-mortar strategy of the firm, to understand how the brand had sustained itself during the pandemic, the near-future outlook of the company, the efficiency of its financial management, the risk that they might face in the future and lastly if the firm is a good candidate for a long term investor.
Brick-and-mortar Strategy
Store growth is an important factor for clothing companies to grow and sustain online sales which is what Lululemon has always been doing. Lululemon has aggressively expanded their brick-and-mortar stores for the past few years while the other major retail brands have been more defensive and invested more on their website/apps experience.
Lululemon today has over 515 stores around the world. Their stores have allowed them to grow the concept of athleisure, allowing customers to wear their product during physical activities or for more casual occasions.
In June 2020, despite the worldwide situation, Lululemon has decided to acquire the company MIRROR for a price tag of $500 million. The main product of this company is a mirror with an integrated screen allowing its users to see themselves during a workout and follow along to workout programmes. The selling price is at $1495 which seems a high price point compared to a regular gym membership, however some individuals who are willing to pay more than hundred per month and the MIRROR seems to target those individuals. Membership is $39/month and will allow the user to access to different online classes. The MIRROR is a direct competitor of Apple Fitness and Peloton.
Additionally, the synergy between Lululemon and The MIRROR is interesting as they will be able to display the MIRROR product in Lululemon stores for customers to be able to try it out along with their new Lululemon outfit. The company is already trying the concept in some of the US store.
An opportunity for Lululemon could be for the customer to purchase items from the MIRROR at home with suggestions according to the classes taken.
The Pandemic
During the worldwide pandemic in 2020, store closure has been inevitable for every retail brands and knowing the reliance of source revenue from Lululemon stores, a drop in sales would have been expected. But despite the pandemic, the company's strong capabilities in e-commerce have maintained a strong top line and bottom line. With a net income of $329 million in 2020, they have increased their bottom line by +129% whereas in 2019 they have had a net income of $143 million.
The pandemic has forced the firm to focus on their Direct-to-consumer channel (online sales). Lululemon is relatively small compared to its competitors such as Nike or Under Armour, but managed to get out of the pandemic situation with a stronger balance sheet than the previous year which is good news as the pandemic could have been a factor of slowing growth for the firm.
The outlook provided by the company during the last earnings report is achievable. They are announcing a North America revenue to grow at a level of 14.9% by 2023 and an International revenue to grow at a level of 38.0% by 2023. In the past, Lululemon has always matched their goals announced during earnings report, and while the economic recovery seems to be on the way thanks to the roll out of vaccines in most of developed countries, the near-future of the firm is promising.
Financial management
Lululemon's averaged operating income margin of the past 5 years has been at a level of 19.76% whereas its peers in the same industry are at 13.62%. This is remarkably good as the brand is in an expansion phase and could be tempted to lower its price and reduce its operating margin in order to raise brand awareness.
Also, the company has a quick ratio (or acid-test) at 1.67 which is a really good result knowing that the pandemic could have weakened the financials of the company. Also, being aware that the brand is growing rapidly, it could have been tempting for the firm to borrow more and end up with more debt than the company can afford.
Risk
At the moment I can foresee mainly two minor risks which the brand could face.
The first one is the acquisition of MIRROR which in my opinion is a very good synergy with Lululemon, but because it is the first acquisition of the company, there can be a lack of experience and the execution of the merger can encounter some difficulties. This can end in acquiring a product at a cost that does not bolster Lululemon's sales or the MIRROR not to be promoted through the Lululemon brand, which is unlikely to happen.
The second risk is macro, as the brand relies a lot on its stores, I would be worried if they had to close stores again because of the pandemic, as I believe that the customers would like to be able to experience Lululemon stores again and the demand could drop.
Conclusion
At the moment Lululemon is expanding and is not at the same stage as Nike or Under Armour, but it is a growing brand. But if we try to compare them, the EBIT margin of Lululemon FY20 which is at 20.1% and Nike FY20 which is at 12%, shows that Lululemon is managing very well to reduce its costs and has very good selling prices.
At the moment, with a share price at around $320, the PE ratio is around 72, which is very high for a value investor. Above, in the pandemic section, I have mentioned the outlook that Lululemon has provided during the last earnings report, which is very promising for 2023. If the goals would be reached, the PE ratio would come down to 25 which is more reasonable, assuming that the share price would not change.
For a long term investor, Lululemon is a good candidate if you like to come in early for a brand which is in expansion. Also, beware of the two risks mentioned above which are the merger with MIRROR that could create some difficulties to the firm, and the economic turmoil as the brand highly relies on its in-store experience.
Thanks for reading.
GSerdan