Lululemon Atheletica (NASDAQ:LULU) is expected to announce third-quarter earnings Wednesday evening, and some analysts are suggesting LULU stock may drop. The Earnings Whispers numbers on earnings and revenue suggest Lululemon will come in with earnings and revenue that beat analysts’ expectations. But Lululemon stock is already priced above its 12-month price forecast.
For many investors, this means one of two things has to happen: The LULU stock price has to come down, or its price forecast has to go higher.
The holiday season can lead to irrational exuberance. However, I’m not sure investors need to step away from the punch bowl when it comes to Lululemon stock.
Lululemon Is Behaving Like a Luxury Brand
I respect the approach that Lululemon Athletica is taking to grow its premium athleisure brand.
In a previous life, I worked with a number of luxury brands that had become part of a larger corporation. The corporation made what I felt, at the time, was a fatal mistake. Instead of explaining a value that went beyond price, they tried to make the brand more accessible to the masses. In most cases, they diluted the luxury brand to the point of it being unrecognizable as a premium brand.
Needless to say, they didn’t command a premium price either.
That’s why I respect Lululemon’s approach to retail. Unquestionably, LULU has a loyal and passionate user base. The brand made its name by being a provider of premium yoga pants for their core female demographic. This has spawned what Grand View Research has cited as an “apparel cultural shift in the workplace at a global level.”
Translation: If you haven’t seen Lululemon in your office, you’re just not paying attention.
In-Store Still Accounts for Two-Thirds of the Company’s Revenue
They are now taking this approach one step further with the debut of an experimental store that they launched this past summer. The 20,000 square foot store in Chicago’s Lincoln Park neighborhood is, in my view, a wonderful example of what a premium brand should offer to consumers. On the ground floor of the store, consumers can shop in a Lululemon store complete with items that are exclusive to that store.
However, that’s only the beginning. The store also includes a healthy food restaurant, a yoga studio and a gym among other things. But, here’s where the story gets better; the restaurant serves a Beyond Meat (NASDAQ:BYND) burger.
It’s one example of how Lululemon is attempting to give consumers a reason other than price to consider Lululemon as a brand.
Lululemon Stock Is Excelling in the World of E-Commerce
Barbara Kahn is a marketing professor at the University of Pennsylvania’s Wharton School of Business. Kahn is also the author of The Shopping Revolution: How Successful Retailers Win Customers in an Era of Endless Disruption. In a blog post for the Wharton school, Kahn said of luxury brands, “It used to be enough to just have the very best luxury product. But in today’s very, very competitive retailing environment, it’s not OK to just be good at one thing. You have to be good (in) at least two different things and good enough in everything else.”
The other thing that Kahn was referring to was e-commerce — and Lululemon is learning the lesson well. In the second quarter of 2019, Lululemon’s online sales were approximately 25% of the company’s revenues. This was virtually unchanged on a percentage basis from 2018. However, LULU direct-to-consumer revenue increased 30% on a year-over-year basis. That said, investors will be looking to see if LULU can replicate its impressive growth.
Lululemon is also incorporating many of what are becoming e-commerce best practices. One of the popular initiatives has been the ability for consumers to place an order online and pickup their item(s) in store.
LULU Is a Big Fish in a Growing Pond
The global athleisure market was being valued at $300 billion in 2018. Of that $300 billion, 65% is considered the premium segment that Lululemon and other large brands occupy. Simply put, Lululemon is a massive player in the largest segment of a growing market.
Regardless of which direction the earnings report pushes the stock, LULU is a company that is doing luxury well, and I believe it will continue to be rewarded. Technical analysis can tell you an optimal time to buy or sell — but fundamental analysis tells you what stocks you should buy. At moments like these, those two areas can conflict.
Keep it simple: If you like the stock, buy it. And if it briefly goes on sale, better still.
As of this writing, Chris Markoch did not have a position in any of the aforementioned securities.
