A recent study by FindTheCompany determined the top 50 performing S&P 500 stocks over the last decade. Included in the list were athletic apparel stalwarts Under Armour Inc (NYSE:UA) and Nike Inc (NYSE:NKE). Nowhere on this list was Lululemon Athletica inc. (NASDAQ:LULU) … LULU stock is the dominant player in athleisure wear.
LULU was a force to be reckoned with between 2009 and 2012, when it delivered annual returns of 280%, 127%, 36% and 63% respectively.
Not too shabby.
Unfortunately, it then suffered serious quality control issues, which eventually led to former CEO Christine Day leaving the company, only to be replaced in early 2014 by Burton Snowboard veteran Laurent Potdevin.
The troubles knocked LULU stock for three consecutive losing years before bouncing back in 2016, up 53% year-to-date through Aug. 18. But even if LULU didn’t suffer these setbacks, it wouldn’t have made the list of 50 stocks for two reasons: First, it’s not an S&P 500 stock; and second, it didn’t IPO until July 2007.
Forget about the index for a moment and let’s just focus on stocks trading on either the NYSE or Nasdaq. Looking ahead over the next decade, I believe LULU stock has what it takes to be one of the 50 best-performing stocks come 2026.
Why LULU Stock Has What It Takes
When Lululemon hired Potdevin, I felt his experience with Burton made him the right person for the job. Founder Chip Wilson clearly didn’t think so at the time and he still doesn’t. In June, he suggested through a very public letter that the company doesn’t have a plan and is losing ground to its competitors including NKE and UA.
Wilson might want to spend more time worrying about his family’s Kit and Ace brand. It has been going through growing pains of its own; earlier this year, it laid off 10% of its staff and CEO Darrell Kopke. Those living in glass houses shouldn’t throw stones.
In June 2014, when LULU stock was trading around $37, I suggested a buying opportunity was staring investors in the face. Since then, its stock is up 115% compared to 13% for the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
My rationale at the time was that its business was actually in pretty good shape with e-commerce revenues steadily rising, gross margins bouncing back and bottom-line earnings remaining relatively healthy despite the problems its new CEO was busy fixing.
Fast forward to today and comps are once more on the rise. In a recent CNBC interview, Potdevin reminded viewers that Lululemon operates in this segment of the apparel industry for the right reasons — not just to take advantage of the ongoing athleisure trend gripping the country.
Combining its technical know-how with fashion forward design, Potdevin sees LULU doubling revenue and profits by 2020. Just one quarter into fiscal 2016, the company expects annual revenue of at least $2.3 billion and $2.08 in earnings per share, 10% higher than in fiscal 2015.
Its online business continues to play a big part of Lulu’s business. In Q1 2016, its direct-to-consumer business increased 18% year-over-year on a constant currency basis to $97.6 million or 19.7% of overall revenue. I wouldn’t be surprised if that number was closing in on 30% by the time 2026 rolls around.
Detractors focus on the fact the shift away from denim that took Lululemon on this wonderful ride is about to come to an end, as people tire of wearing yoga pants to the coffee shop. If that happens, and I doubt it will, LULU is not the one that will be hurt by this, but rather the Johnny-come-lately’s whose brand loyalty hasn’t been earned over two decades.
Bottom Line on Lululemon Stock
If Lululemon continues to make inroads in the men’s market, and that’s a big if, I don’t see why it can’t be one of the 50 best-performing stocks over the next 10 years.
The bigger threat: Nike or Under Armour or someone else buys it before the decade is up. It’s a real possibility and with momentum firmly on its side, you can bet potential suitors will want to pounce sooner rather than later before the price gets too high.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.