<span style="color: #9e9d9d;">Bank of America reinstated coverage of Lululemon with a “Buy” rating.
“We view LULU as one of the best growth stories in retail and expect the brand to be a winner in a COVID and post-COVID environment,” wrote analyst Lorraine Hutchinson. “A margin accretive e-commerce business, an outsized international expansion opportunity and the development of categories that will significantly increase its addressable market are factors that should drive consistent earnings growth.”
Hutchinson wrote that the yoga-themed retailer has the potential tap growth in new categories as it builds on strength in existing categories. She wrote, “LULU‘s elevated athletic offering created a new category, led by its >$100 yoga pants. The assortment‘s functionality, aesthetic and durability have reinforced its higher prices. The development of the Men‘s ABC pants lays the groundwork for a functional commute to wear and at work/business, increasingLULU‘s total addressable market significantly.”
In women’s, which accounts for 70 percent of sales, management’s goal is to grow the business at a low double-digit rate over the next five years. One growth path is expanded sizing, with sizes 0-to-20 having launched in August 2020. A more inclusive size range is expected to reach the majority of its women’s assortment by the end of 2021.
Bras, especially those supporting running and training activities, is also seen as an opportunity. Lululemon entered the category in 2019 with its Enlite bra and launched its Run Time style in Q319. Wrote Hutchinson, “LULU has learned that when a customer buys a high support bra, she’s more likely to make a repeat purchase, so it’s a vital category LULU will continue to invest in.”
Hutchinson said Lululemon officials noted at its 2019 analyst day that the brand is “good, but not great” in the running category but remains committed. She wrote, “LULU is focused on expanding its offerings, recognizing their customer is buying certain pieces, but LULU is lacking in terms of offering a larger run assortment. For example, LULU might have the perfect running tight for women, but it doesn’t yet offer the perfect top to wear with it. We expect a wider assortment of running products to be launched over the next several years and contribute to women’s sales growth.”
In men’s, the company’s goal is to double sales from 2019 until 2024. The analyst has grown more confident about Lululemon’s men’s potential with the 2019 launch of the Fast & Free run franchise as well as the strong response seen for the ABC franchise, which has supported several shorts products and Metal Vent shirts. Hutchinson said, “We were skeptical that LULU could move into men’s in a big way and historically thought the men’s business would continue to be centered around women in the store buying for men. The recent launches and moves into the commuting and work areas have turned our view. We now think LULU can be a successful dual-gender concept.”
Regionally, Lululemon is still in the early stages of its international expansion, Hutchinson notes. For example, Lululemon is looking to grow its square footage in China at a 40 percent compounded annual growth rate through 2024 while also boosting its e-commerce presence. “International was profitable in 2019 but should significantly improve as Europe earns money in 2021 and other regions benefit from increased scale,” she wrote.
E-commerce has been a bright spot for Lululemon throughout the pandemic. In the second quarter, digital sales grew 155 percent to represent 61 percent of sales in the period as stores are partially closed. Yet Hutchinson thinks there are still more reasons to be optimistic about the continuing growth of online sales given that the company’s digital sales margins are much higher than those for in-store purchases. The analyst wrote, “We expect store sales per square foot to remain below 2019 levels in 2021, but for e-commerce volumes to more than make up for it and at a higher margin.”
Photos courtesy Lululemon
