Lululemon (NASDAQ:LULU) stock has dropped sharply over the past few days. The decline came after the red-hot athletic-apparel company reported second-quarter numbers that didn’t quite live up to supercharged expectations.
The numbers were good, as the company’s revenues and profits topped analysts’ average expectations, and management sounded an optimistic tone about second-half 2020 sales trends. But the results weren’t good enough for investors who had pushed LULU stock up more than 70% in 2020 heading into the print.
LULU stock plunged about 20% in just a few days following the earnings report.
Investors shouldn’t be afraid of this weakness or overthink the situation. The recent selloff of the shares is nothing more than a great opportunity to buy a long-term winning stock on weakness.
Here are three reasons why that’s the case.
Consumer Spending Is on the Mend
Lululemon’s Q2 numbers were a tale of two cities.
In the online channel, Lululemon reported astounding 157% year-over-year sales growth. Meanwhile, the company’s in-store revenue dropped 51% YOY because most of its stores were closed during the quarter. And when the stores reopened, their traffic volumes were lower than normal.
However, about 97% of the company’s stores are now opened. Covid-19 hysteria is fading, consumer confidence is building, and consumer spending is rebounding.
All of this broadly means that Lululemon’s in-store traffic volumes and growth trends will materially improve in the coming months. The 50%-plus drop of its in-store sales in Q2 will likely turn into flattish growth in the back half of 2020 as consumer behavior normalizes and Lululemon’s stores all reopen.
On the back of this rebound, it’s easy to see LULU stock charging higher into the holiday season.
Lululemon Is Still the “Top Shelf” of Athletic Apparel
The athletic-apparel segment is still the hottest segment in apparel retail, and Lululemon is still the “top-shelf” brand in that space.
There has been a broad shift among consumers towards leading healthier, more active lifestyles over the past few years, as well as an equally broad shift towards wearing comfortable clothes more often. Covid-19 only accelerated both of these shifts.
Thanks to the pandemic, consumers are now more obsessed than ever with being healthy, active and fit, while work-from-home and stay-at-home trends have promoted 24/7 adoption of comfy clothes.
In a world where consumers are working out more, being more active, and wearing more comfortable clothes more often, athletic-apparel sales will rise. Thus, for the foreseeable future, the athletic-apparel industry will remain red-hot.
In that industry, Lululemon has turned into the “top-shelf” brand by providing top-quality clothes, cultivating strong brand equity and controlling the shopper experience through its 100% direct-to-consumer business model.
Nothing about this favorable brand positioning has changed recently; the view of Lululemon as the highest quality brand in athletic apparel continues to become more widespread.
As long as Lululemon remains the top-shelf brand in a red-hot space, the company will sustain robust revenue and profit growth, and LULU stock will charge higher in the long-run.
Multiple Major Long-Term Growth Catalysts
In addition to being the top brand in a red-hot space, Lululemon is also supported by multiple, major, long-term growth catalysts which could supercharge the company’s revenue and profit growth for the next several years.
First, Lululemon — which has historically been an athletic-apparel brand that is primarily appealing to women — is rapidly and successfully expanding into the men’s category, which represents a huge global opportunity.
Second, the company is also expanding into new product categories, the most exciting of which is footwear. Lululemon has yet to penetrate footwear, but it has the tools to effectively enter that space which represents one of the biggest and highest-margin product categories in athletic apparel.
Third is the company’s omni-channel expansion. Due to Covid-19, Lululemon has invested heavily into expanding its omni-channel capabilities. These expansions lay the foundation for Lululemon’s online and omni-channel businesses to grow rapidly for the next several years.
Fourth, there’s geographic expansion. Lululemon continues to open stores at a rapid pace. The company opened 17 new stores last quarter — in the middle of a pandemic — and intends to keep launching at least ten new stores every quarter for the foreseeable future. Lululemon’s geographic-expansion opportunities are particularly exciting in under-penetrated markets like Asia.
Fifth is MIRROR, the at-home workout-equipment-technology company that Lululemon acquired a few months ago. This business could be quite big one day, and the synergies between it and Lululemon are seemingly infinite.
Overall, then, there are tons of growth catalysts in Lululemon’s pipeline which should, in sum, help keep LULU stock on a long-term upward trajectory.
The Bottom Line on LULU Stock
Buy Lululemon’s stock on weakness.
Consumer spending is improving. The core long-term fundamentals of the athletic-apparel-retail-sector remains rock-solid. And the company has tons of growth catalysts in the pipeline which will help it sustain rapid growth for a long time.
The valuation of the shares now appears to be reasonably discounted, too.
So don’t overthink this. Buy the dip and hold LULU stock until better days arrive.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm.