Loving Lululemon Stock Because Logic Doesn’t Always Matter

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Lululemon Athletica (NASDAQ:LULU) may not be the quintessential recovery play, but for those that haven’t been paying attention, Lululemon stock nearly tripled off its March lows.

the lululemon (LULU) logo on a mosaic-style wall

Source: Richard Frazier / Shutterstock.com

Here’s a quick rundown of why that move is vexing, and why investors are likely playing with fire if they choose to fight the bullish trend in this name. First, Lululemon makes athletic apparel … the expensive kind. The $68 for a tennis skirt or workout shorts for men kind. Second, those price points imply a Lululemon customer is buying these products and others as status symbols.

Indeed, the Canadian company is an aspirational brand. And what do customers that buy aspirational products like to do? Show them off. That gets into the third point: due to the novel coronavirus, gyms across the U.S. spent significant time shutdown. Plenty still are.

Fourth, knowing that it’s possible to workout from home, limiting the audience of admirers of their workout gear, customers could have cut back on such indulgences. Particularly in this environment when unemployment is high.

All that said, Lululemon stock is on fire. If gyms being closed, unemployment being high, and consumer spending retreating aren’t derailing this name, investors shouldn’t be hasty in making bearish bets.

Lululemon Stock a Stay-at-Home Play in Its Own Right

As noted above, Lululemon would appear to be the antithesis of a stay-at-home stock. After all, one doesn’t keep a Tesla (NASDAQ:TSLA) in the garage anymore than one spends $100 on yoga pants just to wear around the house.

As Peloton (NASDAQ:PTON) proves, there are plenty of synergies between sheltering in place and staying fit. Peloton and Lululemon are often framed as rivals, but it’s not inaccurate to say consumers shelling out for a Peloton also have the means to buy glitzy athletic garb, a purchase that can be “justified” for those paying for live Peloton classes.

If that thesis isn’t compelling, Lululemon’s recent $500 million acquisition of Mirror could be. Mirror makes a home-based fitness machine where users can see themselves or other users, making for an ideal pairing with a high-end athletic apparel maker. Mirror machines cost around $1,500, so it’s reasonable to say those customers can afford Lululemon clothes.

Another item to like with Lululemon is that while it has 305 brick-and-mortar stores in the U.S., just 140 are in malls, which are proving vulnerable to the coronavirus pandemic. Recent analysis by Raymond James indicates that Lululemon has just a handful of stores in which the anchor tenant or tenants – usually big box retailers or department stores – are shuttering locations.

“Our analysis confirms our belief that Lululemon has little exposure to anchor tenants closing, and therefore the company appears largely immune to accelerated fears of the mall apocalypse in a Covid world,” said the research firm.

One way of looking at it is that Lululemon stores are located in malls with higher-end stores that attract an affluent clientele – traits that provide some immunity from the “retail apocalypse.”

Bottom Line

It would have been easy to assume the pandemic would derail a company like Lululemon, but that hasn’t been the case. It’s also not hard to say this stock is pricey at almost 82x next year’s earnings and 11.74x sales.

The good news is that Lululemon has some growth levers to pull. First, it can make inroads with men, which currently account for just 23.5% of sales.

Second, the company can bolster its online footprint. At a time when e-commerce is rapidly becoming the king of the retail universe, about 72% of Lululemon sales happen in brick-and-mortar stores. If the company can hit its desired 50/50 split by 2026, the stock could have years of growth ahead of it.

Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.

Todd Shriber has been an InvestorPlace contributor since 2014.


Article printed from InvestorPlace Media, https://investorplace.com/2020/08/lululemon-stock-is-an-apparel-darling-with-more-growth-ahead/.

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