Three Essential Points to Consider before Investing in Lululemon's Shares
Three Essential Points to Consider before Investing in Lululemon's Shares
Lululemon Athletica (LULU increasing by 1.58%) has climbed its way up in the cutthroat apparel market and managed to establish a niche for itself. Its shares have been a massive success, surging 672% over the past decade (as of Dec. 12), outperforming the broader S&P 500.
The consumer discretionary stock received a boost following the release of better-than-anticipated financial results for the third quarter. However, the shares are still 23% below their all-time high.
Before considering investing in Lululemon, you might want to consider these three points.
1. High-end Brand
Emphasizing superior fabrics and groundbreaking designs, along with positioning itself as the leader in the athleisure category, Lululemon has carved out a premium niche in the industry. This strategy differentiates it from mass-market competitors. Lululemon's products are more expensive than those offered by Nike, catering to a wealthier demographic.
This approach has yielded impressive results. In the past five years, Lululemon's gross margin has maintained an impressive average of 56.9%. This is significantly higher than industry titan Nike, as well as consumer favorite Apple.
2. Challenges in the U.S.
Lululemon's global expansion is progressing well. In the last fiscal quarter, international sales skyrocketed by 33% year over year. Unsurprisingly, China is a major growth driver, with revenue soaring by 39%.
With only 138 stores in China, compared to 373 in the U.S., there's ample room for expansion in the coming years.
However, the majority of Lululemon's sales come from the U.S., falling under the Americas segment. Sales in this region increased by just 2% in the third quarter. Same-store sales, on the other hand, decreased by 2%.
"The U.S. performed as we had expected for Q3," stated CFO Meghan Frank on the earnings call. To improve performance in the U.S., Lululemon is focusing on increasing the presence of seasonal trends within its offerings, as well as expanding color, print, and pattern options.
The intense competition in the industry does not make things easy; management must constantly predict consumer preferences in terms of styles, designs, and colors, as well as the appropriate inventory levels to maintain the brand's image. This is an ongoing challenge.
Despite these hurdles, the business has managed to thrive. Its projected fiscal 2024 sales of around $10.5 billion would represent a staggering 163% increase compared to five years ago. From a broader perspective, growth remains a critical factor.
3. Capital Allocation
Lululemon is a highly profitable enterprise, particularly in cash terms. Through the first three quarters of fiscal 2024, the company generated $417 million in free cash flow. This is the money left over after investing in growth initiatives such as supply chain enhancements or store development.
Lululemon does not pay a dividend. Instead, management has focused on substantial share repurchases in recent quarters. Over the last nine months, Lululemon spent $1.3 billion on share buybacks, with an additional $1 billion authorization recently granted. As a result, the current share count has decreased by more than 3% compared to the previous year.
Investors should appreciate this move as it underscores management's ability to make sound capital allocation decisions when market conditions call for it. Shares reached an all-time high in December last year, following which they fell 23%. The cheaper valuation likely influenced management to capitalize on this opportunity to benefit shareholders.
If Lululemon is on your radar, you now have a grasp of the brand's premium status, domestic challenges, and management's capital allocation strategy. In my opinion, the positive factors outweigh the negative, making Lululemon a compelling investment opportunity at the moment.
To further explore potential investments, you might want to consider how Lululemon's financial performance could be impacted by future investing opportunities in its niche market.
Given its strong gross margin and impressive growth rate, Lululemon has a significant pool of money to reinvest back into the business, potentially leading to even higher returns for shareholders. This abundance of capital could be used for attractive opportunities in finance, such as strategic acquisitions, product development, or market expansion.
The company's focus on share repurchases suggests that they value their shares highly and believe they are undervalued in the current market. This strategy could potentially lead to an increase in the share price, offering promising returns for investors who choose to invest in Lululemon.