Why Lululemon Looks So Much Better Than Most of Its Peers

Apparel retailer lululemon athletica (NASDAQ: LULU) delivered another upbeat quarterly report after the bell Wednesday, with sales up by double-digit percentages, and results looking good both online and in stores. Management raised guidance, and the shares are trading near an all-time high.

In this segment of the MarketFoolery podcast, host Chris Hill and MFAM Funds' Bill Barker discuss how it has achieved its ongoing success, even in the wake of its C-suite challenges. They'll talk brand management and growth plans and offer up some caveats to investors.

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This video was recorded on June 13, 2019.

Chris Hill: Let's start with lululemon athletica. First quarter, I actually saw two different numbers on same-store sales. I saw up 14% and up 16%. We can just split the difference and say they were up double-digits. Lululemon also raised guidance. Shares up not tremendously on the day, maybe 1% or 2%. I think that's because they've had a good run of late.

Bill Barker: Yeah, maintaining at or near an all-time high. And yeah, the numbers that they presented were even a little bit more confusing than that. Its comparable store sales up 6%. 8% on consistent dollar basis. That's making an adjustment for foreign exchange. But then, total comparable sales up 14%. That includes open stores. Total sales up 20%. That includes online. They're doing a lot of things right. The margins are improving, they're getting it right in the stores. That's very much an outlier for retail right now. They're also doing it right online, which is less of an outlier, but great to be doing both right. That's part of the reason why the margins are improving, which is making the bottom line that much stronger.

Hill: One of the things Seth Jayson and I talked about yesterday about Lululemon was the challenges, let's put it politely, that the company has had in the executive suite over the last few years. And yet they've done an effective job throughout, I would argue, the past decade or so, of moving the brand away from initially being associated with hundred-dollar yoga pants to being more of an athletic brand, a lifestyle brand. They've done a very effective job of growing the brand equity of Lululemon. You look at Calvin McDonald, the current CEO, and one of the comments he made was about their plan to, as you touched on, grow digital sales, to double that in the next five years; to do the same with men's sales; to really grow international in a big way. If they continue down this path, I don't see any reason to doubt that they can accomplish this.

Barker: Yes, although I think taking the recent strength of operations and the numbers and then projecting that forward is a danger with retail, particularly with fashion retail. Fashions come in and out. They're, I guess, in an area which is growing, athletic wear. I think they're in a good place. But there'll be a hiccup, or more than a hiccup, there will be a miss somewhere, as there have been in the past. Some of that may be attributable to previous management, which has thankfully departed. But they will not go on forever without having, as I say, either a hiccup or a miss or go off the rails in some fashion at some point.

Hill: Right. I'm not suggesting that it's going to be nothing but sunshine and rainbows for the next five years. I'm curious, though. You used the word "fashion" referring to their retail. Do you think of this as a fashion retailer? I actually think of Lululemon as essentially walking the fine line between fashion retail and full-on athletic retail like a Nike or an Under Armour. I think they've done an effective job of splitting the difference.

Barker: Nobody anywhere should rely upon me for opinions about fashion. That said, as you know, and I've disclosed before, I am the reigning worst-dressed man in North America, and I've retained that for really an impressive period of time. I saw a tweet today to an article, something to the effect of, what the covers and the coverage of women's athletic magazines are. And it was a picture of Billie Jean King from back in the 70s, obviously drawing attention to her competitive abilities and the fact that she was an athlete competing against other athletes. If you were to look at the comparable magazines today, it would be about yoga, and things which are lifestyle, and things which are exercise, but are not competition. I'm certainly not qualified to say whether that's true across the entirety of women's sports and athletic coverage. But, where does Lululemon fall in that? Where do you place it? I don't think of suiting up in Lululemon to go out and compete, which I do think about with Under Armour or Nike.

Hill: I agree with that, although clearly Lululemon makes stuff that is for exercise. Maybe it's social exercise, with yoga or something like that. But no, I think they've done a very effective job of not just growing the company, but really growing the brand. I think the fact that they walk that fine line between fashion and athletic apparel is a credit to them.

Barker: Yoga is not something which is widely recognized as having competitions, although, did you listen to the ESPN 30 For 30 podcast? You ever listen to that?

Hill: Not recently, no.

Barker: They had a season on the hot yoga guy whose name eludes me.

Hill: I've heard of hot yoga, I didn't realize there was a guy who gets credit for starting hot yoga.

Barker: And trying to patent it or something. I'm spacing on his name at the moment. But he had claimed, for years, to have been the Indian yoga champion from many years back, back in the day, when you could make claims and not have them checked, and that check then publicized all around Twitter and Facebook and everywhere else, where information becomes immediate. It wasn't until a certain period of time where there was some international yoga champion, and he was claiming to be it before the inauguration of this event. But you can, I guess, compete in yoga. You. You can. This is what I'm saying. There's still time for you to start competing in yoga. Lululemon can help you out with that.

Hill: My flexibility is so limited, I have trouble tying my shoes. I'm not going to be competing in yoga. But look, it's just a matter of time before this is an exhibition sport in the 2028, 2032 Summer Olympics.

Barker: Let me sell you on something. You're a well-known, internationally, competitive runner.

Hill: Yes, absolutely. [laughs]

Barker: [laughs] Are you going to get better over time from here?

Hill: Probably not. I mean ... where are you going with this? I have other stories to get to.

Barker: In yoga, which, you currently are so bad that you can't tie your shoes, you will get better as you take it up and start competing. Whereas running, which you love and are well-known for, you may have peaked. I don't know. I'm not accusing you of having peaked. In your last marathon, for instance, you didn't wind up hospitalized.

So, you seem, to me, from the outside, to be getting better. But there will come a point where you will say, "You know what, I'm never going to beat the best time I ever had." Whereas I think that your ability to get better at shoe-tying and other things that might come out of your increased yoga use are in front of you.

Hill: You know what? When that day comes, I'm going to be shopping at Lululemon because I know they can actually provide good apparel.

Bill Barker is an employee of Motley Fool Asset Management, a separate, sister company of The Motley Fool, LLC. The views of Bill Barker and Motley Fool Asset Management are not the views of The Motley Fool, LLC and should not be taken as such.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Bill Barker has no position in any of the stocks mentioned. Chris Hill owns shares of Under Armour (A Shares) and Under Armour (C Shares). The Motley Fool owns shares of and recommends Facebook, lululemon athletica, Nike, Twitter, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.