Can Anything Stop Lululemon From Ruling the World?
Nothing much looks like it can stop Lululemon (NASDAQ:LULU) now. In fact, business is going so well for the Vancouver-based athleisure brand that it upped its top- and bottom-line guidance January 14, prompting several analysts to raise their target price for LULU stock.
That’s excellent news if you’re a shareholder.
Nike (NYSE:NKE) recently introduced its line of yoga wear in an attempt to capture some of Lululemon’s action. Not only is Nike introducing its first yoga line (what took so long?), it’s also providing free yoga workout regimens — anywhere from 15 minutes to 45 minutes — through the company’s Nike+ Training Club app.
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“These new workouts are really powerful because they offer the chance to practice no matter what your goal is or where you are on your yoga journey,” Nike Master Trainer and yogi Leah Kim said about the workouts. “With the varying workout focus areas, lengths and poses, there is something for everyone — from the beginner yogi looking to improve their practice to those who are more advanced.”
I’ve covered LULU stock for a long time. The one constant from detractors has always been that Nike and Under Armour (NYSE:UAA) would someday awaken to the fact that Lululemon is for real and put some effort into stealing some of its thunder.
Has That Day Arrived?
Not by a longshot.
Yes, Nike is a much bigger company than Lululemon. In the last 12 months, Nike had $38 billion in revenue on a global basis, almost 13 times Lululemon’s. But Nike is very late to the yoga party. It can’t even hold a candle to Athleta, Gap’s (NYSE:GPS) yoga-inspired brand, and that says all you need to know about the level of concern LULU CEO Calvin McDonald has for his much bigger rival.
The reality is that Nike should have acted 2-3 years ago if it genuinely wanted to own this segment of the athleisure-apparel industry.
So the question isn’t whether Nike or Under Armour can steal LULU’s thunder; the question is how big can Lululemon get?
I’d say pretty darn big.
Lululemon Has Barely Scratched the Surface
If you follow Lululemon stock, you might be aware of the company’s goal to hit $4 billion in revenue by the end of 2020. Given the company’s latest guidance revision, I’d say there’s a good chance for the company to hit the self-imposed target before the end of next year.
Two things stand out from its latest guidance.
First, it was expecting Q4 2018 same-store sales to hit low double-digit growth in the best-case scenario, with overall revenue of $1.13 billion at the top end of its previous forecast. Now, it expects Q4 2018 same-store sales growth to possibly hit high double-digits with revenues as high as $1.15 billion.
That’s $200 million in additional revenue.
And remember, there are still two weeks left in the fiscal year and quarter. It’s possible consumers could do more damage to their credit cards between now and then. Unlikely, but you never know.
On the bottom line, which is what truly drives share prices, the company expects earnings per share of $1.72-$1.74, eight cents higher than the low-end of its previous guidance and seven cents higher on the top end.
Cowen analyst John Kernan recently met with LULU CFO Patrick Guido and came away so impressed that he raised his price target by $3 to $188, providing 32% upside over the next 12 months. Considering the volatility of the markets over the final three months of 2018, it says a lot about Lululemon’s current competitiveness.
In fact, business has been so strong that the company could raise its 2020 targets when it announces fourth-quarter earnings in March. More likely, it will come up with a new five-year target — I’d expect at least $6 billion — and get to work to meet and exceed the new number.
The Bottom Line on LULU Stock
As McDonald said in the company’s press release revising guidance, Lululemon had a very strong year. I expect it to have another strong year in 2019 and again in 2020.
Investors continue to underestimate the company’s desire to compete.
It’s important to remember that it continued to execute at a high level in 2018 despite the fact it didn’t have a CEO for more than five months. That speaks to the dedication of the company’s employees in the stores and at head office.
The only thing that can stop Lululemon from ruling the world is a recession, and that’s not likely until 2020.
As apparel brands go, LULU is the one to own for the long haul.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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