8 Reasons to Buy Lululemon Athletica Stock

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Lululemon Athletica's (NASDAQ: LULU) stock price climbed 21% in 2017 as gross margin expanded and revenue growth accelerated each quarter through the year. Over the past few years, management has been streamlining the supply chain and revitalizing innovation efforts following product quality problems that arose in 2013. After several years of work, 2017 looks like the year these initiatives finally started paying off.

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Here are eight reasons why investors should consider buying Lululemon today.

1. Lululemon has turned a corner

CEO Laurent Potdevin, who took over in December 2013, has spent the past few years correcting supply chain issues that hampered the company's growth after the Luon pants recall in the spring of 2013. This gave an opening to competitors as Lululemon's momentum came to a screeching halt.

But 2017 was a turning point as Lululemon's recent innovations in fabrics and new styles helped revenue growth accelerate each quarter throughout the year. It very much seems like this management team has turned a corner with the operational issues and is now focused on assisting the design teams to ramp up innovation efforts.

Based on management's guidance, Lululemon is expected to finish fiscal 2018 this month with revenue and adjusted (non-GAAP) earnings per share up 11% and 15%, respectively, over fiscal 2017.

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2. Margins have been expanding

One of the reasons investors are warming up to Lululemon is the improvement in gross margin, which is usually a telling sign of how strong a brand is holding up against competition. It can also reflect how well new products are selling, as higher markdowns can lead to lower average selling prices and lower gross profit.

As you can see in the following chart, from 2012 to 2016, gross margin steadily declined, but that trend started to reverse over the last year. Lululemon's gross margin expanded to 52% in Q3 after falling into the 40s.

Management is continuing to find ways to cut costs, so gross margin could expand further over the next few years.

3. Recent products are performing well

Successful new product launches can have the effect of multiplying sales across other categories, which can help boost Lululemon's margins. For example, strong sales in new top styles can carry over to pants, which carry some of the highest margins for Lululemon.

In Q2, Lululemon shored up a weakness in women's tops with the Enlite sports bra, which created a "halo" across the women's category, according to Potdevin.

Lululemon followed the successful launch of Enlite with the recent launch of Everlux, a new synthetic fabric that contributed to a 24% increase in sales in the women's pants category in fiscal Q3.

The men's ABC pants continue to drive strong interest in the brand with men, with a 21% increase in sales from new male guests during the fiscal third quarter.

4. Momentum heading into calendar 2018

Lululemon's fiscal third quarter earnings report released in early December showed the brand poised to finish the year strong with record traffic during Black Friday weekend. It was also the company's third consecutive quarter of beating analysts' earnings estimates.

Management reported on the third-quarter conference call that more innovation is on the way for the spring assortment, and the company will also launch the ability for customers to buy online and pickup in store next year, which could help boost comparable-store sales growth, as well as bolster digital sales, where Lululemon has seen growth hovering at 25% or more in recent quarters.

5. Lululemon is growing very fast overseas

One sign that Lululemon still has many years of growth ahead is the strong growth coming internationally. Lululemon's Asia business continues to grow at triple-digit rates, and Europe continues to look very promising, growing 40% in the recent quarter.

6. Lululemon is debt-free

Not only is Lululemon growing and enjoying nice momentum right now, but the company is also debt-free and has $650 million of cash on the balance sheet. That, along with growing earnings, gives management plenty of ammunition to reinvest in new product styles and potentially return cash to shareholders.

7. Lululemon leads all apparel retailers in sales per square foot

Sales per square foot is a key measure of retail success, particularly in evaluating store productivity. Lululemon ranks No. 1 among apparel retailers with $1,560 sales per square foot, according to research from CoStar. The average for most retailers has been $325 in recent years. While average sales per square foot has declined throughout the industry over the last decade, Lululemon is one of the few that have bucked this trend.

8. The athletic apparel industry is growing

Lululemon's stock is certainly not cheap, trading for 28 times earnings estimates for fiscal 2019. The stock has jumped 18.5% in the last month following a solid third-quarter earnings report, but don't let that keep you from buying shares. There's plenty of demand for athletic apparel around the world, as Lululemon's international growth as shown.

Lululemon serves a large, growing athletic apparel market, which is a luxury many brick-and-mortar retailers don't have these days. The athletic apparel industry has grown about 4% per year over the last 10 years, according to Morgan Stanley. Sales are expected to be $290 billion in 2017 and reach more than $350 billion by 2021. With management calling for just $2.6 billion in revenue for fiscal 2018, Lululemon has a lot of room to expand.

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John Ballard has no position in any of the stocks mentioned. The Motley Fool recommends Lululemon Athletica. The Motley Fool has a disclosure policy.