Back in January, an article appeared in Canada’s Financial Post, suggesting Lululemon (NASDAQ:LULU) could be the next Nike (NYSE:NKE). While LULU stock has a long way to go to catch Nike — LULU’s $26 billion market cap is one-fourth the size of Phil Knight’s baby — the fact that it is four times larger than Under Armour (NYSE:UA, NYSE:UAA) says it’s come a lot farther than anyone could have predicted.
As consumer discretionary stocks go, Lululemon is a must-own. That’s especially true in times of recession. When the economy sputters, the cream rises to the top. CEO Calvin McDonald’s latest move provides further evidence of why LULU is more than ready to handle the novel coronavirus.
And that’s an excellent thing if you’ve been a long-time shareholder.
Pay Protection Through June 1
On Feb. 21, the company updated the Covid-19 situation for its 38 stores in China, which had been closed since Feb. 3. At that point, some were able to operate on a reduced hours basis. All have since reopened and business is improving.
Louis Navellier and the InvestorPlace Research Staff discussed the China situation on April 14:
“He [LULU CEO Calvin McDonald] 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.”
On March 15, the company announced that it would close all stores in North America and Europe from March 16 through March 27. The company’s e-commerce site remained open.
Employees would continue to be paid for hours scheduled during the closure. Also, those facing particular hardships would have access to the company’s Global Relief Pay Plan.
On April 2, the company provided an update on its Covid-19 employee support plan, which included keeping its stores in North America, Europe, Malaysia, Australia and New Zealand closed for the foreseeable future. More importantly, the company stated store employees would continue to be paid through June 1, whether the stores open or remain closed.
“At lululemon, our people are our top priority. These decisions enable us to support our teams and immediate business priorities, while balancing what is required to plan for the recovery and growth to follow,” McDonald stated in its April 2 press release. “We’re making the right commitments now as we navigate what’s ahead for the future.”
It’s Got the Financial Might
There aren’t many brick-and-mortar retailers that have stepped up to this extent to keep employees in the fold. Kudos to McDonald and the board for having the business sense to understand how vitally important its front-line employees are to the company’s long-term success.
As part of its effort to keep momentum on its side, senior leadership will reduce their salaries by 20% and the board will forgo their cash retainer. These savings go to its We Stand Together Fund for employees facing Covid-19 related hardships.
In addition to the pay cuts by senior management and the board, to handle the financial hit from the coronavirus Lululemon has stopped all stock buybacks; it’s actively managing its cost structure, including reducing its capital expenditures, and slowing its pace of store openings and remodels.
Lululemon has $1.1 billion in cash, an undrawn $400 million credit revolver, plus zero debt. If anyone can survive the coronavirus, LULU is at the top of the list.
The Bottom Line on LULU Stock
In the fourth quarter ended Feb. 2, Lululemon’s direct-to-consumer e-commerce business grew by 41% over a year earlier. That’s 600 basis points higher than the 35% increase for the entire fiscal 2019. It’s nice to have online sales that are accelerating to go along with 9% comps for its physical stores.
Chief Financial Officer Patrick Guido discussed its e-commerce business during its March 26 conference call:
“In our digital channel, we posted a 41% constant dollar comp increase on top of a 39% increase last year. For the quarter, e-comm contributed approximately $464 million of top-line or 33% of total revenue. Increased traffic in Q4 continued to drive comps, both in-store and online, with increases in the high single-digits and over 30% respectively.”
With lots of people home doing yoga through the company’s virtual yoga classes, you can be sure that its online sales should help cushion the blow of its stores being closed for extended periods.
In December, I argued that LULU stock would be the next Nike. The coronavirus is but a bump in the road for the company.
In five years, investors will say, “Under Armour, who?”
LULU stock is a long-term buy.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing, he did not hold a position in any of the aforementioned securities.
