Categories Analysis, Retail

Will Lululemon stock surge higher in the second half of 2020?

Lululemon is up 35% in 2020 and while it may remain rangebound for the rest of 2020, the retail company is a solid bet for the upcoming decade

The COVID-19 pandemic has decimated several sectors including retail, airline, restaurants, tourism and hotels. However, shares of athletic apparel retailer Lululemon (NASDAQ: LULU) have surged higher by 35% in the first half of 2020, easily outpacing broader market gains.

Lululemon stock has generated massive wealth since its IPO back in 2007. It has returned over 2,000% since it went public, compared to S&P 500 and NASDAQ returns of 104% and 260% respectively in this period.

Lululemon stock has been one of the top retail companies due to its stellar revenue growth. In fiscal 2019, the company reported revenue growth of 21% while earnings were up 28%. Then the COVID-19 pandemic struck, which led to store closures driving Lululemon stock to a multi-year low of $128.84. The stock is currently trading at $307, which means it has gained a significant 138% since bottoming out in March 2020.

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One of the key drivers of its stock price recently has been Lululemon’s robust direct-to-consumer (DTC) sales in the first quarter that surprised analysts and investors alike. In Q1 of fiscal 2020, Lululemon reported sales of $652 million, compared to consensus estimates of $688.48 million. Its adjusted earnings came in at $0.22, just below consensus estimates of $0.23.

Company sales were down 16% on a constant currency basis. Direct to consumer sales in Q1 was up 68% year-over-year and accounted for 54% of total sales, up from just 26.8% in the first quarter of 2019.

Recent acquisition to supplement retail products

Lululemon designs and distributes a variety of athletic apparel and accessories. Its portfolio of products is marketed under the Lululemon brand. As the company products are non-seasonal, there is steady demand all around the year.

On July 8, 2020, the apparel giant closed the acquisition of MIRROR, a major player in the in-home fitness company that creates interactive workout platforms and features live and on-demand classes. The acquisition was valued at $500 million in cash.

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Lululemon aims to build an ecosystem that will fuel the company’s growth plan that includes driving the business through Omni guest experiences and the MIRROR acquisition will boost Lululemon’s digital sweatlife offerings.

Last year, Lululemon had outlined its vision of becoming an experiential brand and the recent acquisition will enhance the company’s digital and interactive capabilities as well as accelerate the growth of personalized in-home fitness products.

Why Lululemon stock is a solid long-term bet

The COVID-19 pandemic is likely to remain a temporary headwind, which means that Lululemon stock will move higher once normalcy resumes and its retail stores reopen at full capacity. For now, the shift to DTC will hold the company in good stead and drive top-line growth in the upcoming quarters.

Further, the online shopping trend is here to stay and will continue to benefit the retailer in the long-term as well as boost profit margins. Lululemon is also targeting international expansion. The company’s management has projected international sales to rise by 300% between 2018 and 2023.

Lululemon stock is trading at a forward price to sales multiple of 10.4 and a price to earnings multiple of 72. While these metrics are unusually high for a retail company, investors need to note that Lululemon earnings are expected to rebound 50% in fiscal 2021 while its sales are forecast to rise by 26%.

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