Lululemon Athletica (NASDAQ:LULU) stock is back on the upswing. Yes, Lululemon stock got clobbered during the March crash — shares declined by as much as 50%. But they have recovered swiftly, with shares rallying from $130 to $195 over the past couple weeks. There’s good reason for that.
Looking at the retail scene, you have a wide variety of companies ranging from those on life support to those that will undoubtedly come out of this all right.
Lululemon is in the survivor category. It will make it through this crisis and be in good shape on the other side.
Yes, the current situation in retail is brutal. But Lulu is a best-of-breed retailer with three key strengths that are especially valuable right now.
Lululemon’s Excellent Balance Sheet
Lululemon has a fantastic balance sheet. In fact, it has a net cash position in its treasury. This means that if you add up the company’s cash and short-term investments, they exceed its liabilities.
As of last quarter, Lululemon had $1.1 billion of cash on hand. Counting inventory, pre-paid expenses, and other such items, it had $1.8 billion in current assets. Against that, Lululemon had just $620 million in current liabilities, meaning it has its short-term obligations covered several times over.
Notably, Lululemon’s cash balance doubled last quarter; the company’s strong holiday season allowed it to build a large cushion heading into this economic shock. Also, you should take into account that the company has no long-term debt whatsoever. The company’s biggest liability, at $611 million, is the leases on its stores.
However, Lululemon should be able to negotiate discounts on those thanks to the crisis. Even the strongest athletic brands like Nike (NYSE:NKE) are demanding stiff rent concessions, Lululemon should be able to as well, which will generate further shareholder value. In any case, Lululemon can withstand adversity for a long while.
International Operations Are Already Bouncing Back
Another reason to favor Lululemon stock is that it has a vibrant international operation. This makes it superior to many of the other retail names that have plunged lately. If the U.S. comes out of quarantine quickly, the more domestic-focused companies can recover in good time. But it’s more risky to invest in those sorts of firms.
Lululemon, by contrast, has an extensive array of stores around the globe. It has more than three dozen stores in Australia along with a rapidly growing presence in China, East Asia and Europe. This gives Lululemon an edge. While the virus is still raging in much of the world, it has started to subside in much of Asia.
As Lululemon CEO Calvin McDonald noted on the company’s conference call March 26, all of Lululemon’s stores in China except the Wuhan location are open. And nearly all their other Asian stores are doing business as well. While it will take a while to reach full speed, economic data out of China is showing a considerable rebound from just a few weeks ago.
Direct-to-Consumer Channel Makes Lululemon Resilient
Even if Lululemon doesn’t have all its stores open for a while, it has another way to reach its clients: the internet. Over the past few years, Lululemon has built a robust direct-to-consumer sales channel. So in-store sales are not as essential as they are for many other retailers.
In 2019, Lululemon laid out its “Power of Three” plan for the company. Over the next five years, it will build its business in three ways: product innovation, international market expansion and growing direct-to-consumer sales. To that last point, in 2019, Lululemon pulled in 29% of its revenues via direct-to-consumer sales. This figure could grow toward 50% in coming years.
Lululemon is investing heavily in platforms such as its loyalty program and an order online, pick-up in store offering to drive its digital presence. In the meantime, with many brick-and-mortar stores closed for now, the digital channel gives Lululemon a steady revenue source even in these trying times.
LULU Stock Takeaway
A crisis is a Darwinian event. It creates hardships for everyone, but the strongest survive. In fact, in the financial world, the strongest don’t merely survive. They capitalize on the crisis by taking market share from their weaker competitors.
Lululemon now enjoys a tremendous opportunity. This is the biggest crisis for retail in ages, and many companies came into it flat-footed. They carried too much debt, they didn’t have enough international presence, or they lacked a strong omni-channel approach to reach consumers away from their physical stores. Athletic wear rivals that lack these traits, such as Under Armour (NYSE:UA) (NYSE:UAA), have seen their stocks implode recently.
Given its strengths in these areas, Lululemon stock is already outperforming the competition. And it should enjoy further gains going forward. With its three advantages over rivals, the company is poised to benefit from turmoil within the retail industry.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends … before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south. Eric does not own the aforementioned securities.
