Lululemon Athletica Inc. Stock Is Running a Bit Too Fast

Lululemon is a long-term growth story, but some correction is in order. Buy the dips

Lululemon LULU stock

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It’s been an incredible first half of 2018 for Lululemon Athletica inc. (NASDAQ:LULU). LULU stock is up 50% year-to-date, and the company just delivered an astoundingly good earnings growth. Reports of Lululemon reaching market saturation were grossly premature.

What comes next for Lululemon? Judging by the company’s most recent conference call, there is plenty more excitement in the pipeline. The company is aggressively building out new stores and product lines. How will it work out for LULU stock? Can fundamentals keep improving fast enough to lift shares even farther?

Lululemon’s Growth Plans

The price of LULU stock isn’t the only thing growing lately. 2018 promises to be a transformative year for the company’s retailing strategy as well.

Lululemon’s Chief Operating Officer, Stuart Haselden, laid out the strategy on the company’s conference call last week. Haselden said:

“In 2018, we’ll actually execute more real estate projects than in any other prior year. We mentioned in the prepared remarks, we’re going to see a 14% increase in the global square footage. We’re going to see a healthy number of new store projects in North America.”

This flies directly in the face of the bear narrative. For years, we’ve heard that Lululemon has already built out the North American market, that its future growth potential was in more questionable international markets where Lululemon’s specific brand of yoga culture is much less entrenched. But this conference call should put those notions to rest.

Footwear: Lululemon’s Next Opportunity

Specifically, Mr. Haselden went into more detail about what Lululemon may do with all its new retailing space. On the conference call, analyst Brian Tunick of RBC Capital Markets asked if footwear could be one of the company’s “pillars” in 2020 and beyond.

To that question, Haselden stated that:

“We’ve been pleased with the tests that we’ve done with APL [Athletic Propulsion Labs] and I think we’ve learned a lot from it. We learned that our guest is interested in buying shoes from us.”

It’s too early to see just how footwear will develop. Haselden noted that it would be “premature” to think of shoes as a “major growth opportunity” just yet. But that may just be modesty on his part.

It seems likely that Lululemon can be a major player in the market. The big players, such as Nike Inc (NYSE:NKE) and Adidas AG/S ADR (OTCMKTS:ADDYY) have led the market for years. But it’s uncertain if their hold over women’s athletic shoes isn’t nearly as strong as with men’s shoes. Basketball endorsements, for example, hold less weight. Lululemon is ideally positioned to take more share as its brand is a perfect fit. And, interestingly enough, in recent quarters, Lululemon is attracting a ton of new male customers. That has caused Lululemon to roll out more products for men. And who knows? Perhaps even Lululemon male footwear will catch on over time.

Athleisure Is Still Hot

Another big tenant of the LULU stock bear thesis has been that athleisure is a fad. Bears would make disparaging comments about the need for yoga pants — surely Lululemon’s products were just for a small niche. But years later, Lululemon’s core product lines are still in high demand, and as footwear is showing, Lululemon appears to have other opportunities to broaden the brand.

Lululemon’s most recent quarterly report was a triumph from start to finish. The company grew top-line sales by 25%, or 19% after adjusting for favorable currency development. Due to management’s efforts to streamline the supply chain, profit margins also showed solid evolution.

Perhaps most importantly, Lululemon’s e-commerce business is booming. Lululemon notched a stunning 60% year-over-year growth rate for e-commerce. That moved the company up to 24% e-commerce as a total portion of sales. That’s up big from 19% this quarter last year. Companies such as Lululemon that can effectively use both the physical and online channel to boost sales will be the retail winners in the, Inc. (NASDAQ:AMZN) retail-apocalypse world. In fact, when planning something like the footwear roll-out, Lululemon is specifically looking to use their physical stores as a showroom to drive e-commerce sales where a much wider selection is available.

It’s also noteworthy that Athleta continues to prosper. The athleisure brand, owned by Gap Inc (NYSE:GPS), is posting double-digit growth rates as well. The market is still developing nicely, Lululemon is putting up great numbers. And with the whole pie growing, there’s plenty of reason to think that LULU stock can keep moving upward in coming quarters.

LULU Stock Verdict

At the beginning of this year, I suggested that LULU stock would be a good purchase if it broke through long-running technical resistance at the $80 level. That trade has worked out perfectly. Once LULU in fact cracked 80 in March, the stock went to the stratosphere. It would reach $100 by May, and topped $120 with earnings last week. That’s a 50% run in a just a few weeks after years of trading sideways.

After such a huge move, caution is in order. As good as Lululemon’s earnings have been, it’s hard to justify a 50% runup on fundamentals alone. Clearly momentum is playing a big role, and once that fades, LULU stock could correct. To give one example, Credit Suisse raised its LULU stock price target from $105 to $125 last week. Less than a week later, it reached $125. That sort of move speaks to extreme investor sentiment.

In the longer-term, however, Lululemon’s growth efforts are clearly paying off. Any correction would be a buying opportunity for investors.

At the time of this writing, the author held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.

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