Along with the vast majority of retail stocks, Lululemon Athletica (NASDAQ:LULU) stock took a dive in late February. LULU stock continued to fall further in early March.
Some jittery investors wondered if it would take months — or even years — for consumers to start buying athletic apparel and accessories again.
But that’s an alarmist attitude, and fear-mongering isn’t a profitable activity. Lululemon is already showing signs of life in Asia and there are stores waiting to open in multiple countries. Lululemon CEO Calvin McDonald is confident that the company will recover, and he has every reason to feel that way.
There’s No Need to Exaggerate the LULU Stock Situation
When a shock event like the spread of the novel coronavirus happens, emotions tend to flare up. That’s natural but it’s not always productive. Still, some analysts might look at the fact that Lululemon’s stores in North America, Europe and New Zealand are closed and conclude that the company’s in trouble.
But there’s really no point in exaggerating the problems here. Sometimes you’ve got to “accentuate the positive,” as the old song says. With the exception of a store in Wuhan, all of Lululemon’s Chinese stores are now open. Plus, throughout the rest of Asia, the only Lululemon stores that are closed now are two in Malaysia.
Besides, it’s not as if people don’t want athletic wear anymore. New research from Piper Sandler reveals that Lululemon remains among the top 10 preferred apparel brands. In fact, the company moved up two spots, from No. 8 to No. 6, compared to the previous survey.
It’s also encouraging to see that Lululemon is attempting to cut costs during this challenging time. Top executives at the company have accepted a 20% pay cut and Lululemon’s board have sacrificed all retainers. The money saved through these cost-cutting measures will be placed into a fund designed to support the company’s employees.
Confidence Is Justified
When CEOs make grand statements, sometimes investors must take them with a grain of salt. In McDonald’s case, however, his confidence is grounded in reality. During a conference call following Lululemon’s fourth-quarter earnings release, the CEO hinted that Lululemon has what it takes to recover fully from the pandemic-driven setback:
“[W]e have early learnings from China which show us that our business will bounce back. We are not yet back to pre-closing volumes, but the business is getting stronger week-by-week.”
That’s not to suggest that McDonald is wearing rose-colored glasses. He fully admitted that while sales in China are growing quickly, they’re not yet back to the level of sales prior to the coronavirus outbreak. The CEO added that Lululemon’s business in China “will bounce back” and furthermore indicated that the company’s business in the United States will also recover.
It’s indisputable that Lululemon remains in a strong fiscal position even with so many store closures. During the fourth quarter, the company generated $298 million in net income, a major improvement over the $218.5 million generated during the same quarter of the previous year.
The company also had $1.4 billion in revenues in the fourth quarter, easily beating the $1.17 billion collected during that comparable quarter of the prior year. Also during this time frame, comparable-store sales increased by 20%.
Not only that, but Lululemon has no long-term debt, something that not every retail company can claim nowadays. The company also has $1.1 billion in cash, further supporting the CEO’s confidence that Lululemon can ride out this crisis.
My Final Word on LULU Stock
Being in a strong financial position means that Lululemon’s CEO can remain confident even during tough times. LULU stockholders should believe in the CEO and the company as Lululemon’s stores won’t stay closed forever and the recovery will be extraordinarily profitable.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.