A month ago, some people raised concerns about Lululemon Athletica (NASDAQ:LULU). One of the most powerful brands in the athletic apparel space, the company made a rare move: discounting its highly desired products. Over a five-day online only sale, LULU slashed several price tags deeply, causing concerns for the longer-term viability of Lululemon stock.
While discounting has become commonplace in retail, businesses have also learned an important lesson: if you don’t have to drop your prices, don’t. That’s not something that brands such as Gap (NYSE:GPS) and Victoria’s Secret have taken to heart. While discounts attract foot traffic and ring up sales, the problem is that they’re drags on profitability.
More worryingly, consumers learn to adapt to the broader price-slashing blitz, like a Pavlov’s dogs for humans. If a retailer relies too much on pricing and not enough on inherent quality or other attributes, its customers will simply wait for future concessions. Understandably, then, some observers of Lululemon stock had reservations about LULU following the trend.
Fortunately, those fears have turned out to be unfounded. While discretionary retail sales have taken a hit during this novel coronavirus pandemic, Lululemon stock is one of the fortunate few that’s moving against the grain. Moving forward, prospective investors should take this resilience as a sign: this is a brand that you can trust.
Primarily, this is the case because so many consumers love the Lululemon Athletica brand. It’s more than a credible thesis that following this crisis, LULU will thrive. Thus, shares continue to rise, even with the negative implications of last month’s sales.
This was merely a case of good company making a tactical decision under bad circumstances.
Demographics Is the Key for Lululemon Stock
Most of you are familiar with my work with technology companies. For years, I’ve discussed the coming convergence of multiple innovations sparking what I termed the Roaring 2020s. Put another way, technology represents a megatrend, or a dynamic that will catalyze mass-scale changes in society. Ride one of these through smart stock selections and you’ll set yourself up for financial success.
And yes, I used the plural in the last sentence, which means there are several megatrends. One of the most powerful, especially regarding Lululemon stock, is demographics.
Specifically, the company targets young, high-income earners, which makes sense: they’re the most likely to buy Lululemon’s premium label products. However, targeting this demo has another benefit: more than half of Americans making over $90,000 a year exercise.
In this context, the coronavirus may be a benefit to Lululemon stock. Consider that so many people were cooped up in their homes. This led to a sharp spike in demand for states that first reopened their economies. In many states that are afflicted with hot spots, people are again sheltering in place for their safety.
However, as recent history demonstrated, this creates pent-up demand, particularly for trendy products. In addition, people going stir crazy may end up switching off the TV and starting exercise regimens. Potentially, this could spark a new user base for LULU.
Plus, the pandemic has not disrupted demographic categories equally. For instance, white-collar workers – those that are making $90,000 and above – are largely able to work from home. Therefore, whatever happens regarding the proposed second round of coronavirus relief packages, it mostly won’t matter to Lululemon customers. Relatively speaking, they’re insulated from the crisis, which in turn should help bolster Lululemon stock.
Brand Loyalty Is Huge for LULU
Another one of my favorite discretionary retail names is Nike (NYSE:NKE). Like Lululemon, Nike didn’t initially appear a safe bet when the pandemic first struck us. With people scrambling for essential goods, nobody cared about Nike-branded apparel.
Except that they did. Though it lacks the bullish firepower of a “true” coronavirus stock, NKE has been a consistent winner since the March lows. One of the reasons for this is Nike’s tremendous brand loyalty. People will buy the Nike brand through storms either manufactured or natural. As evidenced by LULU stock, it’s the same situation for the underlying brand.
That’s why I’m not worried about any near-term tactics that Lululemon has deployed. Management is doing what’s necessary to ride out the storm. But the core business remains intact. With such proven reliability, you don’t want to miss out on LULU.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.