Lululemon Athletica (LULU): Increased move to active lifestyle sets up opportunity for growth and expansion

Lululemon Athletica (NASDAQ: LULU) has seen its shares gain 40% since the beginning of this year. The company’s second quarter 2020 earnings results, which were reported on Tuesday, were better than analysts’ projections. Despite the beat, the stock tumbled over 6% on Wednesday.

As the company continues to navigate through the COVID-19 pandemic, it is seeing changes in consumer behavior in terms of working from home, sweating from home and an increased move to active and healthy lifestyles. These trends are in line with the company’s strengths and provide opportunities to gain market share.

Quarterly performance

Total revenue increased 2% to $903 million, coming ahead of the company’s expectations of a high single digits decline. Revenue from company-operated stores fell 51% while direct-to-consumer (DTC) revenue increased 155%. Adjusted EPS was $0.74.

In the first quarter, Lululemon had to close all of its stores in North America, Europe and across Latin America due to the pandemic but during the second quarter, the company began reopening these locations and by the end of the second quarter, the majority of its stores were open.

Digital growth

Like most retailers, Lululemon too witnessed a surge in sales from its digital channel during the lockdown period. DTC revenues increased 155% on a reported basis and 157% on an adjusted basis, making up 61.4% of total revenue during the quarter compared to nearly 25% in the same period last year.

The company saw strength in traffic and conversion, with traffic increasing 90% helped by channel shift and digital marketing investments and conversion growing 45% driven by guests’ response and investments made in digital platforms to improve the guest experience.   

Lululemon continues to invest significantly in its ecommerce channel by developing site enhancements, increasing its omni functionality and increasing fulfillment capabilities. The company has pulled forward many of these investments due to the unexpected acceleration in the ecommerce business.    

MIRROR acquisition

Lululemon closed the acquisition of fitness company MIRROR in early July and the company is on track to begin offering the MIRROR in 10-15 Lululemon stores in the US by early fourth quarter. MIRROR is expected to be modestly dilutive to earnings this year.

Lululemon plans to increase its marketing and advertising spend in the second half of the year to drive MIRROR’s growth during the holiday season and into 2021. MIRROR is estimated to generate in excess of $150 million in revenue for the full year of 2020.

Outlook

Due to the prevailing uncertainty, Lululemon is not providing specific guidance for the full year of 2020. The company will focus on leveraging its omni-model and digital strength while continuing to invest in its digital channel to maximize its second half and holiday business.

Lululemon expects to open 30-35 net new stores in 2020, which will contribute to a low double-digit increase in square footage for the year. The company plans to operate approx. 70 seasonal stores in the second half of the year.

Revenues are expected to grow sequentially for the remainder of the year. In the third quarter, Lululemon expects revenues, inclusive of MIRROR, to increase in the mid to high single digit range while in the fourth quarter, revenues are expected to grow in the high single to low double-digit range. In the digital channels, revenue growth rates are expected to remain above 30-40% but moderate in the second half due to store re-openings.