Elastic Growth, Lululemon
(Company Spotlight, Edition 5, August 2021)
Lululemon, Edition 5, August 2021
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Elastic Growth, Lululemon
I came to this write up as a somewhat recent consumer of Lululemon men’s attire.
As someone who adores comfort over style (but preferably a bit of both), discovering Lululemon was like a well in a desert for me.
The ACB (anti-ball-crushing) pants are both formal and casual, and most importantly, comfortable. The shorts and basic t-shirts (which I wear almost every day) are fashioned from materials that are of very noticeable tangible quality.
For years my partner (who comes from a family of yoga practitioners, and practices herself) has raved about the women’s Lulu apparel, from the pants to the yoga mats.
So, for years, it feels like this brand has been screaming at me, but I had never taken the time to fully understand how this business works, or where its origins were born. I had assumed it was largely a yoga-based apparel business.
Sometimes the best ideas are staring you in the face.
Aware of the probable confirmation bias, I placed my analyst hat on and set to work uncovering what makes this brand tick.
Much to my surprise, I would discover that Lululemon has long been a profitable company, accumulating a vast wealth of retained earnings, expanding margins, and an exciting value-proposition of international expansion through their company-operated stores and digital commerce business. The global penetration of the Lululemon brand still appears to be somewhat nascent.
Moreover, I would discover that this business has a decade-long stretch of impressive ROIC, but only now appears to be re-accelerating under their new management.
Calvin McDonald, appointed CEO in 2018, often refers to ‘the sweat life’ as the lifestyle of their target audience. McDonald has stated on numerous occasions that he believes “life is a sport”, so Lulu is effectively targetting both the consumer who wants high-performance technical gear, as well as the consumer who wants comfortable and durable leisurewear. This is regardless of whether they are at work, at the gym, or going for brunch.
The products that Lulu sell captures the essence of the rise of sports-leisure attire, marrying both aesthetic appeal and technical performance.
Originally known for their high-performance yoga pants, Lululemon has now expanded into all crevices of the consumer’s closet and cater to all genders across a wide array of sporting activities, as well as a more casual ‘on the go’ range.
Contrasting this to a business like Underarmour, which has failed to successfully pivot into less exercise-focussed apparel, it comes as no surprise that companies like Lululemon, Nike and Adidas continue to dominate this industry, catering to both sets of consumers.
Athletic leisure attire is now a fashion statement. Often I will see women sporting the Lululemon yoga pants, with a casual T-shirt, and some trainers. Most of these women are not on their way to a yoga studio. They simply want to look good, and be comfortable. Both founder (Chip Wilson) and current CEO (Calvin McDonald) have publicly stated they do not believe in the idea of athleisure, preferring to label the products as technical apparel.
Post-Wilson, who left in 2013, the company largely cruised without any real thrust. The power of the Lulu brand and their direct to consumer and store strategy allowed them to continue to grow.
In 2018, Calvin would join the company and release an audacious 5-year plan, titled the “power of three” that would see Lululemon lay its sights on product innovation, omnichannel experience, and market expansion as their primary drivers.
After having competed in the technical apparel space for decades, against the likes of Nike, Adidas, and Puma (as well as many others), Lululemon would widen its addressable market in 2020 by acquiring Mirror, a business that supplies hardware and digital subscriptions to the at-home fitness demographic.
This deal would see Lululemon expand its relationship with consumers in that they no longer just equip these customers with the apparel to get sweaty, but now also the tools and services to do so as well.
Despite entering a market of pure-play market leaders like Peloton, the price paid for Mirror ($500M) now appears to be a steal when considering that FY21 revenues for the business are projected to be between $250M and $275M.
The Brief History of Lululemon
Lululemon was founded in Vancouver, Canada, in 1998 by Mr Chip Wilson (no longer with the company) as a yoga-inspired athletic apparel brand aimed at women.
Wilson had spent two decades in the extreme sports business (mostly skate, snowboard, and surf) prior to founding Lululemon. It is said that, whilst attending one of Vancouver’s first commercial yoga class workshops, he grew to love the practice.
Lulu’s first designs were made for women to wear during yoga. In the following years, the company would expand into running, cycling, training, and other sweaty pursuits for both women and men.
After spending decades involved with technical athletic apparel, Wilson discovered that the majority of the clothing worn for yoga (which was largely fashioned from cotton at the time) was unbreathable, inflexible and unpractical.
He reasoned that yoga apparel should contain all of these features, to allow for comfort when exercising.
Later that year, Wilson opened up a small design room, in Vancouver, to begin working on samples of a new kind of pant. To maintain the rent for the space, he decided to turn the design room into a yoga room in the evenings. Here, he would test out his designs on his yoga instructors and gain feedback.
Interestingly, the first pair of Lululemon pants were fashioned in 1998, in the same year that Sarah Blakley would become the founder of Spanx.
Frustrated by the ‘shapewear’ that is existed in the 90s, Blakely wanted to create the “perfect canvas undergarment” which would smooth everything around the butt and thighs, and create no impressions from the underwear on the outside of the pant.
She quickly patented the idea, and the garment would be made from 70% nylon and 30% lycra. Spanx was a huge hit, and her fascinating story was shared with Guy Raz at the ‘How I Built This’ podcast, which can be found here. This appeared to be the first inroads to the realisation that women could better accentuate their bodies with comfortable clothing.
The original Lululemon pant would be made from 81% nylon and 19% lycra (which they trademark as Luon), implying that there would be a little more room for stretch than the shapewear that Blakley had fashioned. After all, they were built for separate purposes.
The design studio that Wilson had opened in 1998 would become the first Lululemon store two years later on West 4th Avenue in Vancouver’s Kitsilano neighbourhood. Settling on the name ‘Lululemon’ was apparently an attempt to create a name that sounded ‘Western’ to the Asian demographic on account of there being three Ls in the name. Thus, the name has no real hidden meaning or roots.
The stylised ‘A’ which appears in the brand logo for the company was apparently a design from another potential brand name ‘Athletically Hip’ which was not chosen. Others will look at the ‘A’ and see the shape of a woman’s body. Some will see a woman’s haircut. There has never been an official statement from Lululemon, so we are left to speculate.
2005 was the year that Lulu began to venture outside of their yoga-orientated make-up, which had helped them grow their recognition as a premium quality product offering, and launched a range of lines across categories like t-shirts, shorts, jackets, sweaters, bags, accessories, and yoga mats.
After the Lululemon brand become to permeate nationwide, the company would file for IPO in 2007, selling 18.6 million shares and receiving net proceeds of ~$31.4 million, most of which was directly funnelled into CapEx (for new stores) and inventory purchases to fill those new stores.
Lulu would grow their store count at an impressive ~15% CAGR from 2008 to 2020, now standing at 523 stores as of Q1 FY21, with ~28% of those stores being located internationally (ex-US and Canada).
Lulu’s founder, Chip Wilson would leave his operational post at the company in 2013 after a spate of PR incidents that threatened to taint the brand and resign from the board altogether in 2015.
Without going into too much detail (as we are focussing on the Lulu that stands today), Chip had a habit of publicly disclosing some controversial opinions about women, child labour, and fat-shaming, amongst other things.
Not exactly in line with the ethos of the Lululemon brand, which stood for empowering their customers through providing them with the right equipment to enjoy their life and get sweaty. Despite being the visionary, and the enigmatic force which would propel Lululemon into the limelight, it was time for Chip to leave.
Chip Wilson would later write a book about his time at Lululemon, titled ‘Little Black Stretch Pants’, which can be found here.
Despite the brand image being battered along the way, an observer of the financials would not notice any significant impact. From their time as a public company to the current day, Lulu has never recorded a YoY decline in revenues or gross profit.
From sales of $270M in 2008, Lulu’s sales base has expanded to over $4.4B (15X) in 2020.
Lulu was expanding both domestically and internationally through the sale of their apparel and accessories in their company-operated stores as well as their direct to consumer business.
The ‘Other’ segment (which is comprised of outlet and warehouse, wholesale, and licensing agreements) was bolstered by the company’s first major acquisition of Mirror for $500M in June.
Mirror, a NY-based start-up, would “bolster the company’s digital sweatlife offerings and bring immersive and personalized in-home sweat” through their offering of wall-mounted, internet-connected mirrored screens and monthly membership fees that offer an alternative to attending a gym.
Lululemon had already been benefitting from the ‘home fitness’ demand that was accelerated during the covid pandemic through their sale of fitness attire. Now, through their acquisition of Mirror, Lulu would be taking a more direct stab at the industry via the combination of hardware and subscription offerings, much in the same way that companies like Peloton have found success.
I will come back to Mirror shortly, but for those of you who want to gather some more insight into the deal, I suggest reading this official announcement from Lulu, this Financial Times article, and this piece from Forbes.
Lululemon is principally a designer and distributor of premium lifestyle inspired athletic apparel. Core product lines (which cater to both men and women) include an assortment of high-quality tops and bottoms suited for all manner of sporting activities, as well as an assortment of accessories for those sports, and a footwear line expected within the next 12 months.
From sourcing materials, to design, to distribution, the entire Lululemon experience is vertically integrated, and customers will only be able to find Lulu products in a Lulu store, whether it be company-operated or via their DTC digital business.
This process appears to be tightly controlled, with Lulu only relying upon ~40 vendors to manufacture their products, with the top 5 producing ~59% of their products last year. Moreover, a further 65 suppliers are entrusted to provide the fabrics for manufacture, with the top 5 accounting for 65% of all fabric supplied last year.
Lulu has long adopted an ambassador approach to their marketing with thousands of local and store ambassadors across their physical and digital presence and ~50 global ambassadors who tend to be high profile sportspeople with a personal brand that resonates with Lulu’s.
One of the most recent global ambassadors, announced in 2021, was Joe Wicks the fitness sensation from London. Joe rose to fame initially after posting his “Lean in 15” recipes on Instagram, before launching a series of cookbooks, a fitness app, and a hugely successful library of digital content on YouTube. He even embarked upon a nationwide campaign to give PE classes across the UK and ran a series of at-home live workouts during lockdowns, which gathered tens of millions of viewers.
A hugely successful self-made and driven guy, passionate about healthy eating and exercise. This is what Lulu look for in their global ambassadors.
In return, they are expected to act as a spokesperson for the brand and are granted early access to new lines as well as free merchandise, and the ability to elevate their brand to an audience that aligns with their own interests. It appears to be highly mutually beneficial.
Whilst brands like Nike tend to focus on acquiring pricey megastars, I imagine Lulu’s grassroots approach allows them to acquire customers at a much cheaper rate, with a potentially more organic feel. Most superstars have an array of brands they promote for and customers understand that. For someone like Joe Wicks, who has a following in the tens of millions, to connect with a brand, feels much more natural.
At present, the vast majority of Lulu’s revenues are concentrated within North America (86% of 2020 sales) and across customers who shop the woman’s range of apparel (69% of 2020 sales).
Lulu currently reports on three distinct revenue segments across their company-operated stores, the DTC business, and their other category. I am going to break down the economics of each reporting segment in the next segment, but for now, I will detail each one at a high level.
Typically the company-operated stores are the primary source of revenues for the business but as you will see in 2020 the dynamic was skewed heavily in the favour of the DTC.
As stores were impacted by the corona pandemic, many were temporarily closed, leaving customers forced to utilise the digital marketplace for Lulu goods. The result was a 33% YoY decline in physical store revenues with a subsequent 100% growth in DTC for 2020. Whilst revenues did increase YoY, it’s hard to know for sure whether a transitory channel shift took place, or if the market for Lulu expanded during the covid pandemic.
Even prior to the pandemic, the composition of digital sales had rapidly been growing in prominence. Over the last 5 years, DTC had grown from 18% of sales to 29% by 2019.
Now that 93% of stores are now back open (as of Q1 FY21), I imagine this dynamic will shift once again, but I can’t help but think this was a positive bout of exposure for the higher-margin DTC business.
Up until ~2015, Lulu had just one store type which would roughly be identical in design regardless of where it was placed within a city. More recently, we have seen them experiment with other store formats.
Traditional Stores: The traditional store format tends to be between 3,000 to 5,000 square feet in size, and houses collections from both the men’s and women’s collections.
Seasonal Stores: Lulu suffers from the same seasonality that is present across the retail industry as a whole. To compensate, the company operates a seasonal store strategy which sees them open anywhere between 60 to 100 stores each year on short-term leases. You can almost think of them as “pop-up” stores.
These stores have the dual benefit of allowing Lulu to explore new markets (reaching new customers in tandem) to gauge demand without committing to a long term lease as well as supporting and scaling back supply during seasonal periods.
Experimental Stores: These stores tend to be between 4 to 5 times the size of a traditional store and contain an array of additional spaces for workout classes, yoga, meditation rooms, canteens, and even a WeWork-style co-working space.
See the Chicago store for more details on that. With the Chicago mega-store, they are tapping into that experiential brand element. During the 2019 analyst day, Calvin McDonald suggested that these stores could represent as much as 10% of the total store count by 2023.
Outlet Stores: Lulu also own ~38 outlet stores, which allow them to sell slow-moving inventory as well as inventory from prior seasons at slightly discounted prices. You will sometimes find traditional stores with a mini outlet position underneath the main floor, or in a section of the ground floor.
Interestingly, Lulu is not a frequenter of the “markdown market” like most other retailers in their category. The outlet stores, and a section on their website called “we made too much” is really the only way to get marked down items and despite the markdown (which is often minimal) they are still premium priced.
As of Q1 FY21 Lulu has 523 company-operated stores with 72% of those located within the US and Canada.
Clearly, the largest growth vector over the past 5 years has been within the international markets, which show 109% growth over the reported period versus the North American segment’s 13%.
Understandably, it appears that Lulu is primarily focused on regions where the average disposable income is higher than the global average, given the nature of their relatively pricey apparel. China, for instance, has a booming population of middle-class citizens with expanding disposable income for discretionary spending and has grown from just 3.7% of the store count in 2017 to 10.7% in just four years, now representing ~39% of the total international store base.
As we know, one of Lulu’s core pillars is market expansion, and over that same period, international stores have grown from 17.3% to 28% of the store count. Whilst ARPU for these consumers may be lower, and management has expressed that cost structures are harsher overseas, there exists a reasonable runway for growth there.
A more recent addition to the executive suite was André Maestrini, brought in this year as the VP of International. Maestrini had previously spent 14 years at Adidas growing the brand across multiple channels (physical and digital) as well as being an important cog in their expansion to China, Latin America, and France.
This experience clearly resonates with Lulu’s ambitions of market expansion and omnichannel penetration. Equally, as Adidas was a retailer who had a particular appeal to men, an area Lulu is looking to bolster, André appears to be a great talent acquisition.
Direct to Consumer
The DTC business is, by all accounts, Lulu’s digital e-commerce sales channel. Arguably the most important growth vector for the business, the DTC business has grown sales at a CAGR of 38% from 2015 to 2020, versus the 16% CAGR exhibited by the total revenue base.
However, it is important to remember that 2020 came with an extremely high artificial adoption rate of DTC due to the volume of store closures.
Thus, the $545M that has been collected from the DTC business during the first quarter of this year, might result in a full-year revenue base that is flat YoY when considering that Lulu generated $2.3B in DTC revenues during 2020.
However, managing to equal the revenue base from 2020 for FY21 would be an impressive feat in my opinion on account of the monstrous comp. Data from the first quarter does suggest that the strength of company-operated store sales are beginning to scale back into the core-funnel, with DTC revenues losing 8% of their share sequentially.
What is most interesting to me, is where that DTC composition settles. I imagine it has to be a fair improvement from the pre-pandemic levels of 29%. This recent year was more or less a pull-forward in digital, as well as a shift of consumption over the DTC because of the global environment. Should Lulu see a subtle decline in YoY DTC revenue, I personally won’t be that concerned.
A greater share of revenues derived from DTC is great news for Lulu, as this segment typically carries an operating margin of ~40% + relative to the company-operated segment which (pre-pandemic) has operating margins in the mid to high 20s.
Having said that, a core part of Lulu’s strategy is its omnichannel experience. One segment will not be expanded at the expense of another. Community-based marketing, as well as the global base of local ambassadors, is an important component in maintaining that experiential brand. As such, simply focussing on the higher-margin segment is not a viable option for Lulu, as it risks deterioration of their connection to consumers, something which is arguably harder to do with a digital presence.
Everyone loves a business with a range of ‘other bets’ which can represent underlying opportunities, or call options, within the core business. Optionality is king, after all.
For Lulu, their other revenues segment has long been concentrated across their outlet sales, the sales derived from their seasonal stores (temporary in nature), wholesale, and licensing deals which they adopt periodically when they believe it will provide a strategic advantage to the company.
These revenues have grown from $128M in 2015 to $459M by 2020 at a 24% CAGR, which is faster than the overall revenue base over the same period (16%).
This segment became more interesting last year after Lulu acquired the at-home fitness hardware and software provider, Mirror in a $500M deal. After initially making a small investment in the company in 2019 to build out the initial relationship, Mirror would represent the first stand-alone call option in the other revenue segment.
So, What is Mirror?
The core element of Mirror, or the “nearly invisible home gym” is a free-standing Mirror placed on the wall of a consumer’s home, which acts both as a reflective screen and a monitor to observe workout routines. Users can take any number of fitness classes related to a wide array of sporting and physical activities.
(See this video for a demonstration)
The product appears to be something you would expect Peloton to offer and, in time, they might well offer something similar.
The at-home fitness trend certainly caught the attention and demand of consumers during 2020, most notably exhibited through market leader, Peloton (financials below).
Quarterly YoY sales comps for the at-home fitness collective (Peloton) accelerated into the triple digits throughout the covid-period, and have remained elevated ever since.
Similar to Peloton, Mirror offers 0% APR financing on their hardware, which costs consumers a minimum of $42 p/m for a 36 month period and no deposit. The digital subscription, which allows users to access the content, is a further $39 p/m and is sold separately.
This industry (at-home fitness) was growing well prior to the lockdown environment which pulled forward a great deal of adoption and exposure. Thus, whilst it may be fine to suggest the demand will decline from that baseline of 2020 in the near term, the idea of working out at home through a combination of hardware and digital content is not something that only became popular because of the pandemic.
In the last year, we have also seen Apple launch a Fitness + service across the content of their services, validifying the model for both Mirror and Peloton. However, it is worth noting that Apple does not offer hardware, and the relative size of their bet is a drop of water in their vast ocean of operations. Thus, a failure for Apple Fitness + (or the adoption of the at-home fitness industry as a whole) is not catastrophic to their business. For Mirror and Peloton, this is quite the opposite.
Management asserted, in Q1, that the Mirror product is now available in ~100 stores, and will be featured in closer to 200 stores by year-end.
“We now have dedicated MIRROR specialists among our educators in each of these stores, and the early sales results are encouraging. We will have more to share about MIRROR later in the year as we gear up for new features, add more live classes and expand into Canada, the first international market of several we will see in the future for MIRROR.” - Calvin McDonald, CEO of Lululemon, Q1 Earnings Call
At the time of the acquisition (Q2 FY20), Lulu appeared to have paid ~5 times forward sales for this business, which was expected to have ~$100M in FY20 revenues.
At the close of the fiscal year 2020, we discovered that Mirror had in fact generated $175M in sales for the year
And for this year (FY21) management is now guiding for sales of between $250M to $275M, meaning Mirror is expected to grow another ~50%.
So, when we frame it as though they paid ~2 times FY21 sales, it would appear to be a reasonably priced deal.
On paper, it appears to be a pretty convincing value proposition. There is a natural fit between Lulu’s existing customers who are purchasing technical apparel for “the sweat life” and Mirror customers who are purchasing hardware to get sweaty. Mirror instructors will be wearing Lululemon attire, offering up some nice cross-pollination opportunities. What’s more, the gender split across Mirror’s consumer base is 50/50, suggesting it can become a fruitful segment for acquiring new male Lululemon apparel consumers.
Whilst not currently profitable, management believes that long term they “definitely see it as a profitable business - and very much within our control”
For now, it appears that Mirror will have a modest impact on the bottom line (diluting it between 3% to 5% for FY21) whilst bringing in an accretive top line.
For the sake of comparison, Peloton is likely to accumulate in excess of $4B in sales this year and is a world-known brand that has invested heavily in its supply chain (including a sizeable acquisition of Precor), and has a booming base of digital and connected fitness subscribers across an international base.
Mirror, is available in one country, and is expected to generate less than a tenth of those sales volumes, and is inside a company that focuses primarily on technical apparel. In effect, Peloton is a pure-play, whilst Mirror is another company’s “other bet”.
It’s a tough industry to crack, with some considerable market leaders in Apple (digital) and Peloton (digital & hardware), Tonal (digital & hardware), and NordicTrack (digital & hardware), to name but a few.
When reading Abdullah Al-Rezwan’s write-up on Lulu from 2020 (most will know him as Mostly Borrowed Ideas) he made an interesting remark about Mirror which I felt compelled to share today. I enjoyed his framing of Mirror as a VC-Like investment.
“Mirror is, by any measure, a VC-like investment. As it’s true for any VC investment, it can be zero in few years. Given the potential, I can be tempted to value the business at 2-3x times the value Lulu actually paid to acquire Mirror i.e. $500 mn. Even then, it’s 2%-3% current market cap of Lulu, so it doesn’t move the needle in terms of Lulu’s value as of today. I would most certainly not write a $10 Bn check today, but that doesn’t mean it cannot be a major success for Lulu someday. It can be, but I don’t think it’s prudent to assume success by default. - Abdullah Al-Rezwan, November 2020
My own perception is that the Mirror business fits snuggly into Lululemon’s existing value-proposition, and marries well with their consumer base. There exist a multi-faceted pallet of potential cross-selling opportunities, and the price paid does not suggest that Lulu extended themselves too much for this acquisition.
In summary, it appears to be an attractive call option, at a fair price, which may or may not prove to be worth many multiples more than what Lulu paid in 2020.
Equally, as Abdullah said, it may turn out to be a zero but my feeling is that Lulu is likely to recoup their investment within the next few years either way, which would mean the risk is somewhat mitigated. Whatever happens, this was the first time Lulu truly flexed their acquisitive muscle.
The Power of Three & KPIs
Moving on to the KPIs for this business, I wanted to save my discussion on the Power of Three plan for this segment as I feel the focal points of that plan, unveiled in 2019, closely tie into the most important metrics to monitor for Lululemon.
The Power of Three
The Power of Three plan was Calvin McDonald’s first significant imprint on the foundation of his tenure as CEO of Lululemon. Announced during the 2019 analyst day (see here), McDonald would lay out Lulu’s 5-year plan which centred around the pillars that are in place today. Namely, product innovation, market expansion, and the omnichannel experience.
At the time, McDonald would state that from FY18 to FY23, Lulu would:
Double the Men’s Revenue Base
Double the Digital Revenue Base
Quadruple the International Revenue Base
Modestly Expand Gross Margin Each Year
Have Revenue Growth (CAGR) in the Low Teens
Have EPS Growth > Revenue Growth
Incorporate Modest Leverage in SG&A
These were audacious goals, and ones that the broader market appeared to react well to. Lululemon finally had a sense of direction after quietly coasting for a number of years prior.
1) Double the Men’s Revenue Base ($690M to $1.38B)
In the previous year (2018) the men’s line had accumulated $690M in revenues and accounted for 21% of the consolidated revenue base.
This was an interesting dynamic at the time, as Lulu were yet to fully penetrate the men’s market, whilst peers like Nike and Adidas had made their name in the men’s category and were seeking to penetrate the female market.
For context, in 2018 the Nike brand reported that just 23% of sales were derived from their “women’s” segment, whilst 56% were derived from “men’s” with the remainder being generated from “young athletes” and “other”.
Today, Nike’s women’s category revenues stand at $8.55B for 2020, accounting for 24% of sales relative to those same categories. Clearly, even Nike’s women’s category outstrips Lulu’s entire business at this point so the gulf in scale has to be considered.
Nike’s weaker segment (women’s) has grown 23.6% from 2018 to 2020 versus Lulu’s weaker segment (men’s) 38%.
In order for Lulu to achieve their goal, the men’s category would have to hit a revenue figure of ~$1.38B by FY23 and whilst they appear to be on track to attain ~$1B in sales for the men’s line this year, this would still require continued momentum to the tune of 38% over the following two years.
Abdullah (Mostly Borrowed Ideas) highlighted the difference in branding for Lulu’s men’s and women’s lines.
He would explain that he was somewhat bemused that in the women’s apparel, the branding of the Lulu logo is placed centrefold for everyone to see. A form of social signalling if you like. For men, however, the logo is often tucked away out of sight. Only those who know where to look will find it.
“Some brands confer some “badge value” that sit on top of the broader definition of “high quality, low variance” of brands. Owning a “Ferrari”, for example, provides a clear signal of your net worth. While Lulu pants cannot possibly have the same signalling effect as a Ferrari does, it most certainly signals that you were willing to forego a $20 yoga pants from Amazon or $79 ones from Athleta.
The “badge value” of Lulu logo has a social signalling power which appears to be expensive if you think you are buying yoga pants but can actually be a very “cheap” way to express your fashion sense, taste, and social status. This status symbol perhaps becomes even more prominent in international markets as Lulu’s products cost similar across geographies.
I went to their website and started looking at men’s section. To my surprise, I could not find their logo on any of their products displayed although I could easily see the logo prominently placed on women’s products. Then I went to their separate social media channel for men and yet could not see the Lulu logo. I found it strange that if you want to pay premium for the brand (yes, it’s just as expensive for men too), why would you want to not display the logo?”
- MBI Deep Dives, The Economics of the Cult of Lululemon
This approach is contrary to the likes of Nike or Adidas who placed their branding in prominent positions across all of their apparel, regardless of gender.
In the opening remarks to this piece, I noted that:
“The ACB (anti-ball-crushing) pants are both formal and casual, and most importantly, comfortable. The shorts and basic t-shirts (which I wear almost every day) are fashioned from materials that are of very high tangible quality.”
Despite being known for equipping customers with apparel for “the sweat life”, not all of Lulu’s clothing and accessories are worn by those engaging in exercise. As I remarked in the opening statement, a large number of customers like to wear the clothing casually, for comfort. The number of customers adopting this preference has been bolstered by the launch of various collections tailored to that desire, such as the “on the move” line for men.
What I have found, is that most new customers are initially attracted by one particular flagship item, whether that is the women’s yoga pants or the ABC men’s trousers.
After experiencing those offerings, customers will then discover that Lulu offers a whole range of clothing items that are non-specific to activewear. This is certainly how my relationship with Lululemon began.
So, perhaps anecdotally, I am an example of a male who wears Lulu clothing that does not care about the Lulu branding. I know that I am wearing this brand, but the importance for me is how it makes me feel both in terms of comfort and with respect to the quality of the materials.
From the men I have spoken to who also admire Lulu clothing, this appears to be a commonality, comfort comes before branding. As great as Lulu apparel is, the men’s market is still considerably underpenetrated. The majority of men I associate with are not familiar with the clothing. Whilst out for drinks with some old work colleagues, one referred to it as “boujie sports clothing”.
Thus, whilst the men’s market appears to be a rich vein of revenue to tap into, there is still some work to be done to convert the global userbase. I believe this goal firmly sits under the product innovation pillar in that Lulu must ensure the products are attractive enough to entice male consumers without the prominent ‘branding effect’ or superstar ambassadors that is so often seen across the peer group.
In the meantime, the female consumer, particularly in the apparel segment, is a fierce bedrock from which to grow a retail business.
2) Double the Digital Revenue Base ($858M to $1.7B)
From 2018 to 2020 the DTC revenue base expanded from $858M to $2.28B, or 165%, thanks to the pandemic environment.
So, in effect, this goal has been met 3 years early but purely because of environmental circumstances.
As noted, I believe if Lulu managed to meet FY20’s DTC revenue base in FY21 that marks a considerable achievement. For the coming quarter, management has suggested DTC may see a modest decline YoY, as they lap the height of the channel shifts from last year, but anticipate modest growth over Q3 and Q4.
Whilst I would expect the overall composition of DTC revenue to decline this year, I feel it’s safe to assume that by FY23 the goal of $1.7B in DTC revenue will be met.
What is most interesting to me, is if this pull-forward in digital consumption will affect consumer behaviour going forward.
3) Quadruple the International Revenue Base ($359M to $1.43B)
Perhaps the most audacious goal shared in this 2019 analyst day was the desire to quadruple international revenues which, in 2018, were $359M.
Two years into that plan, and international revenues are yet to make their first double, having grown 73% over that period, amounting to $624M in 2020.
The international side of the business is a moot point for me, especially considering there are a limited number of geographics in the world that possess rich enough pools of middle-class earners with the spending power to afford a premium good like Lululemon.
Whilst core markets like Canada and the US tend to grow in the low single-digits each year it would appear the store count in those markets are somewhat saturated. For instance, Canada has opened a net of 2 new stores since 2017 (+3.3%), whilst the US has opened 41 (+15%).
Over the same period store count for locations like China (+273%), the UK (+78%), Japan (+200%), and Germany (+250%) have been growing much faster, albeit from a much smaller base. Those four countries have a combined store count of just 85 with China representing 65% of the total base.
The difficulties of international expansion were outlined in 2019 from Lulu’s, then, COO who stated that “fundamentally, the market dynamics are very different. There is just a more robust appetite for, I think, western brands generally in Asia. And there is a growing health and fitness trend in China supported by the Chinese government, specifically, that is helping sort of add to the tailwind for businesses that participate in those markets. Those factors don't exist in the same way in Europe.
We had some painful lessons in Europe where we did abandon, in certain cases, our proven showroom model, open stores in locations based on attractive real estate where we hadn't yet adequately developed demand, brand awareness in the community in those markets.”
But what cannot be ignored is that the international markets are the ripest for growth, both in terms of revenues and store count. However, the expansion does not necessarily have to be fueled by store count growth.
During that same analyst day call, the COO would state they “do see a greater potential for our digital business internationally and in particular in China”
Lulu has reinvested significant sums into their DTC business across the globe in the last few years which no doubt helps with a more cost-effective presence and sales channel. Further, another 35 to 40 international stores are expected to be opened across 2021.
However, for this business which appears to be so focussed on community marketing, and providing customers with that “local feel”, I wonder whether or not they will receive the same adoration overseas without the robust network of stores and local ambassadors behind them.
After all, we are talking about premium technical apparel here, not something as translatable as a premium cup of coffee or a cost-effective fast-food chain.
We are about to see Mirror cross into Canadian territory soon, with the potential of expanding internationally thereafter, which is something to bear in mind regarding international revenue. That plus the rapid international store expansion could get Lulu closer to the 50/50 split between domestic and overseas revenue that McDonald envisions over the long term.
As recent as the Q1 earnings call, he would suggest he can “can see a time in the near future where our international business grows in size to be equal to our North America business.”
I remain doubtful that this occurs before FY23 but would love to be proven wrong. Management certainly seems optimistic they will hit their target.
4) Gross Margin Expansion, Low Teen Revenue CAGR, EPS Growth, and Leverage in SG&A
The aforementioned three targets are certainly the most headline-grabbing.
Elsewhere, the Power of Three plan laid the grounds for a target of modest annual gross margin expansion, low teen revenue CAGR, EPS growth that would surpass revenue growth, and additional leverage from SG&A.
Thus far, revenue CAGR has been well above the low teens, hindered slightly from 2020 results, and gross margin has expanded over 2019 and 2020, with a further incline anticipated in 2021.
EPS growth has fallen short of revenue growth in 2020, but understandably this was the result of the pandemic and a sizeable acquisition. With 2020 EPS standing at $4.50, Lulu would have to report ~$5.96 in EPS for the coming FY period. Currently, they are guided for adjusted diluted earnings of between $6.73 and $6.86.
At the time, Lulu suggested their revenue growth would stem from a 20% CAGR in men’s apparel, with women’s, accessories and new categories growing in the low double-digit range.
Margin expansion was said to stem from leverage afforded through inventory acquisition cost, a shifting channel mix, and be partially offset by the market and category mixes.
With respect to the SG&A leverage, management highlighted greater fixed-cost efficiencies and channel mix likely stemming from increasing economies of scale. Sadly, the company do not break down gross margins on each segment, nor do they break down SG&A by item. As such, I struggled to really grasp granular insight into this goal due to the opted disclosure (more on this soon).
With any business, the analyst should ideally be following a subset of KPIs that will relate to their thesis and allow them to better track and understand how that thesis is playing out.
In this case, I feel the most important KPIs for Lululemon largely circulate around the metrics they seek to attack in their 5-year plan. At least, if that is inherent within your thesis. I typically take a 3Y to 5Y view when acquiring positions, with the intention of holding for longer.
The Men’s Revenue Base: Ensuring the FY23 target is met, as well as signalling whether or not Lulu is successful in their quest to drive adoption amongst the male cohort.
The DTC Revenue Base: Now that it appears likely the target will be satisfied already, it is worth monitoring the composition of the DTC business, as this will provide an amicable signal regarding Lulu’s operating margin expansion in the coming years. DTC revenues are arguably worth more considering their superior margin profile, and allow Lulu to capture sales within domestic and international markets with a lower CAC.
International Store Count & Revenues: Ensuring the FY23 target is met for international sales, as well as observing the strength of their international store rollout is critical, considering the bulk of Lulu’s future earning power will be afforded via overseas territory. Whilst store count is not the only metric to survey this effort (DTC is also a method to expand internationally), it aligns with their pre-existing growth strategy of building a local network of stores to fulfil their community marketing angle.
Elsewhere, with the promise of both gross margin expansion and efficiencies within operational expenses, I would suspect Lulu’s operating margin shall benefit over the coming years in tandem.
Other traditional KPIs (revenue, EPS) are equally as important, but if we are following the narrative that Lululemon is going to crack the men’s category as well as a greater share of the global market, then these are where I would be focussing.
Additionally, with the Mirror acquisition, whilst I don’t yet have any great disclosure from management regarding this business other than sales and its unprofitable status, the adoption of the product, the membership base, and the optionality afforded through running a subscription-based service should be under close observation. I believe Lulu acquired Mirror for a fair price, and the business could be a potentially lucrative investment in the years to come. I suspect more granularity will come from management in the coming years, and I welcome it.
Lululemon has long been a profitable business. In fact, for the entire duration of their life as a public entity (from 2007), the business has posted both operational and net profit each year without fail.
Over that same period of time, the company has witnessed the expansion of gross, EBITDA, operating, pre-tax, net income, and free cash flow margin, albeit with some variation throughout the years.
To add to that, the company has consistently attained high returns on invested capital, which have dropped below 20% only once across that 13-year period. Even at that, the 17.5% ROIC reported in 2017 was hardly a terrible result.
Premium pants is clearly a business that pays well. Revenues have blossomed over the past decade, compounding at ~20% annually from their base of $712M back in 2010 to $4.4B in 2020 and are expected to grow a further 32% ($5.83B) in 2021.
Equally impressive, is the continuous growth of gross profit which, after having compounded at a similar rate over that period grew from $215M in 2010 to $2.46B by 2020. This is all whilst Lulu maintained a fairly solid gross margin between the high 40s and mid-50s. Today, it stands at 56% and is expected to expand a further 150 to 200 bps by the end of the fiscal year meaning Lulu should generate ~$3B in the current fiscal year.
The cost of Lulu’s revenues, derived from their store sales, DTC business, and other segment, is quite variable in nature, which is perhaps what has afforded them the ability to maintain a steady margin all these years.
Lulu’s apparent reluctance to deploy a heavy markdown segment in their business may also assist this margin expansion we have been seeing. Most retailers like to liquidate over-supplied stock to make way for new inventory but this comes at the cost of gross margin.
What was interesting to me is that Lulu’s days inventory outstanding has steadily climbed over the last decade from lows of ~68 at the time of their IPO to 110 as of 2020.
This is paired with an increasing number of days that sales are left outstanding (see right chart).
[Cash Conversion Cycle = Days Inventory + Days Sales - Days Payables]
Usually, an increasing number of days outstanding for both inventory and sales would lead to a significantly longer cash conversion cycle (the time it takes for Lulu to collect cash from the inventory they purchase after it is sold).
However, in this case, it would appear that, until now, Lulu has offset that loosening of operating efficiencies by bolstering their leverage over suppliers. The number of days payables outstanding has more than tripled to 22 days over the last 5 years.
As a result, the cash conversion cycle has remained fairly steady over that period of time.
This does make me wonder how much further Lulu’s gross margin can go. Whilst management has suggested sequential expansion until 2023 at the minimum, the fact Lulu are holding on to inventory for an ever-increasing period is not a great sign for future margins. Whether markdowns to consumers or inventory write-offs, this will have some effect on the margin profile.
I mentioned earlier (see below) that Lulu has certainly benefitted from the long tailwind of ever-increasing e-commerce penetration.
Data from the US Census Bureau highlights just how large of an impact 2020 had on the national front for retail e-commerce sales. The share of e-commerce spend as a percentage of total retail sales jumped from ~11% in the first quarter of 2020 to as high as ~15% in the latter portion of the year, settling closer to 13% as of Q1 2021.
Source: (US Census Bureau)
This increasing composition of DTC revenue brings with it a greater operating margin profile. In the table below, I have compiled the operating income for each segment, as well as the operating margin (excluding corporate expense, amortisation and acquisition-related costs).
Clearly, the DTC business supports a superior margin profile and, pre-pandemic, was already on its way to becoming the majority stake of the operating margin. With a greater ability to leverage costs over a growing sales base, it should come as no surprise that management cites channel shift as one of the leading drivers of margin expansion for their Power of Three plan.
When we add in those additional costs we can see a solid trend of incremental operating profit growth (forgiving the impact of 2020), paired with a steady margin profile that, for the last few years, has oscillated between the high teens and low 20s.
In absence of any peculiar non-recurring items, Lulu will often kick back between a low to mid-teens per cent of their revenues as net earnings.
Sadly, as I mentioned before, Lulu doesn’t break out their SG&A line item, instead, grouping the total operating expenses into one line with a typically minor inclusion from amortisation and acquisition related-expense.
Disclosure is not optimal, with the 10-K reading “selling, general and administrative expenses consist of all operating costs not otherwise included in cost of goods sold, intangible asset amortization, or acquisition-related expenses”.
It continues to state that:
“The Company's selling, general and administrative expenses include the costs of corporate and retail employee wages and benefits, costs to transport the Company's products from the distribution facilities to the Company's retail locations and e-commerce guests, professional fees, marketing, information technology, human resources, accounting, legal, corporate facility and occupancy costs, and depreciation and amortization expense other than in cost of goods sold.” - Lululemon, 10-K Filing
Candidly, when it comes to the margin profile of both the domestic and international operations, we are left in the dark somewhat. Or rather, I can not be sure what is actually leading that margin expansion, and potentially offsetting that, other than seeing the data from the revenue segment level.
Whilst it is true that international revenues are still less than one-fifth of the revenue base, and there appears to be a considerable runway for growth and reinvestment there, without understanding the full extent of the international business’ impact on consolidated margin, it’s difficult to ascertain what that might look like as the share of international revenues reaches that 50/50 split that McDonald mentioned.
Management has stated in the past that the cost structure of international expansion is a lot harsher than it is domestically.
Liquidity & Cash Flows
Lulu’s balance sheet has long been devoid of debt and has exhibited cash-rich tendencies, with cash often accounting for the majority of the current asset base.
From what I have ascertained, there has never been a period whereby the immediate liquidity of this business was in question. Instead, as the company have continued to reinvest in their store count and fixed-asset base, we have seen the liquidity profile decline somewhat. This is perfectly natural.
On account of Lulu’s profitability, the business has been a long-term accumulator of retained earnings, which total ~$2.4B as of the most recent quarter.
Buffett, someone who has long favoured the use of retained earnings, has written in the past that the best use of retained earnings is to reinvest in the business, rather than pay out that capital to shareholders. (He remarks about Berkshire here, as opposed to the individual companies he owns).
If Lulu management can earn a superior return with the capital, then it makes sense to deploy it in favour of the long-run trajectory of the business. There is no use holding excess cash on the balance sheet, unless it can be put to good work, or returned to shareholders.
Phillip Fisher would echo that sentiment:
“When do stockholders get no benefit from retained earnings? One way is when management pile up cash and liquid assets far beyond any present or prospective needs for the business” - Phillip Fisher
The Lululemon business is extremely efficient in kicking back attractive levels of cash flow, no doubt as a result of their great margin profile.
Equally pleasant is the relative simplicity of their cash flow statement.
Across the investing activities, Lulu doesn’t own a book of short-term investments, thus the only material component of investing activities tends to be their capital expenditure with a minor adjustment for hedging activities. In 2020, the inclusion of a $452M outflow from the Mirror acquisition was also present.
Across financing activities, the outflows are mostly derived from the share repurchases that Lulu conduct under their share repurchase program, as well as some impact from modest stock-based compensation and taxes.
Approved in 2014, Lulu’s share repurchase program currently has ~$416M left to allocate.
Over the duration of the program, Lulu has repurchased ~$1.47B in stock and reduced the outstanding share count by ~10% from 144M to 130M.
It would appear that Lulu has a considerable margin for reinvestment here, on account of their impressive ability to pull in such high-margin revenues and comfortable free cash flow margin.
Management, BOD, and Ownership
The core management team at Lulu is relatively new, given that most of the senior executives have only been in their current roles for a few years. However, as noted, the company were largely coasting after the departure of Chip Wilson, and a rehaul of sorts has taken place. Over the last five years, a number of fresh faces and promotions have resulted in the management team that exists today.
The Core Management Team
Calvin McDonald joined the company in 2018 to revitalise the growth trajectory of the business and bring in some much-needed structure. After a period from 2014 to 2018 where the company moved forward without much direction, the implementation of the ‘power of three’ plan which set the tempo for Lulu’s five-year growth plans (until 2023) was a bold statement.
After consuming hours of interviews with Calvin, he cuts an impressive, calm individual who understands the importance of keeping Lulu’s core value proposition (their technical apparel) as the focus of the expansion efforts.
During a CNBC interview in 2019, he was asked about the potential of new product items, particularly in the self-care and wellness space. In response, he responded that Lululemon would be entering new product markets cautiously, keeping in mind that they only want to be in markets that make sense for their brand. In this same interview, he acknowledged Lulu had been tinkering with footwear, and two years later, we now have confirmation that this will be coming in the next year.
Taking the time to perfect new product roll-outs, ensuring they are of the same ilk as the rest of the product portfolio, is an impressive trait.
After serving as the SVP of financial planning for four years, Meghan was appointed as the interim CFO in 2020 after the departure of Patrick Guido who had been the CFO for two years. She was later given the permanent role in November 2020.
Sun Choe originally joined Lulu in 2016 as the SVP of merchandising and was later promoted to Chief Product Officer in 2018 after Calvin cited her proven track record in leading world-class product teams in previous senior roles.
Julie joined Lululemon in 2017 after spending three years at REI (a sportswear equipment company) where she led strategy and the overall IT operations. Prior to that, she spent a decade at Nordstrom (luxury department store) as VP of selling and marketing. A good range of experiences considering Lulu is a somewhat luxury brand, and are now attempting to penetrate the at-home fitness market through hardware and subscription offerings.
Elsewhere, Celeste Burgoyne (joined in 2006) is the President of the Americas segment having worked her way up from her original role as GM of US Operations. Celeste previously spent ten years as Director of Stores for Abercrombie & Fitch.
Ted Dagnese has served as the Chief Supply Chain Officer since 2016, Nikki Neuburger was brought in to serve as the Chief Brand Officer in 2020, and the latest addition, André Maestrini, was brought in to serve as VP of International in January of this year.
The company retired the Chief Operations Officer role after the departure of Stuart Haselden in 2019. After having joined as CFO in 2015, Stuart was one of the leaders who guided the search for the new CEO in 2018 and left to pursue a role outside of the industry.
It would appear that Stuart’s roles were consolidated across the management team at the time, with his International duties now being transferred to André Maestrini.
Board of Directors
The BOD, chaired by Glen Murphy, contains a range of constituents (average tenure of 6 years) who exhibit particular experience across senior leadership roles, accounting, retail, and strategy.
Source: (Lululemon 2021 Proxy Filings)
Amongst the 11 members, 55% are female and 82% are independent of the company, with only Calvin McDonald (CEO of Lululemon) and Glenn Murphy being classified as dependents.
As you can see from the table below, each member has a varied past, most of which show strength across retail, senior management, and financial roles.
Source: (Lululemon 2021 Proxy Filings)
Insider & Institutional Ownership
At present, institutions own the vast majority of outstanding shares (90%) with notable holders including FMR LLC (14%), Vanguard (7%), T.Rowe Price (6%) and Blackrock (6%).
Interestingly, you will note that institutional ownership of Lulu dropped from highs of 75% in 2010 to as low as 35% in 2018 before Calvin was appointed CEO.
Source: (Guru Focus)
The stock didn’t really do much from 2012 to 2018 and post-appointment of McDonald the stock has clearly done rather well.
The remaining 10% are owned by the general public (9.5%) and individual insiders (0.5%).
Insider ownership is weak, with no single executive owning more than 1% of the company. The largest holder, Calvin McDonald, owns just 0.03% ownership in the business.
Even ex-founder, Chip Wilson, holds a larger stake than any existing executive, with his ~3.8% stake in the business, despite being a net seller of shares over the last five years.
However, it does appear that a large part of the compensation for executives is derived from stock awards (see below), note how in 2020 just 11% of McDonald’s total compensation was derived from his base salary.
Source: (Lululemon 2021 Proxy Filings)
The majority of the incentive package is split across annual cash rewards (goals are announced at the beginning of each fiscal year) and long-term incentives.
Annual cash rewards are typically split across two operating metrics in net revenue (50% weighting) and operating income (50% weighting) whereby there will be three tiers of targets in which the recipients collect 25%, 50%, or 100% of their total payout.
For long-term incentives, the incentives are based on similar targets but the weightings of revenue (30% weighting) and operating income (70% weighting) is adjusted, and the composition of payouts are more inclusive of RSUs and options.
Guidance for Q2 and FY21
Understandably, Lulu’s second-quarter guidance reflects continued pressure from air freight costs due to global supply chain headwinds, but management asserts that they feel confident in their inventory levels.
As of Q1, ~93% of the global store count is open.
Q2 Fiscal 2021 Guidance
Revenues are expected to fall in the range of $1.3B to $1.33B, which would represent a 45% YoY comp and a 2Y CAGR of between 21% and 23%.
Benefitting from increasing e-commerce penetration, as well as lapping a covid-impacted quarter, the gross margin is expected to be between 55.3% to 55.5%, which is greater than both the second quarter of 2019 (55%) and 2020 (54.2%).
Adjusted EPS to range between $1.10 and $1.15 versus $0.74 one year ago. This includes the operating results from the Mirror acquisition but excludes acquisition-related costs.
Expect a modest decline in e-commerce sales as they lap an overwhelmingly strong second quarter of last year. I might remind readers that Lulu’s second-quarter includes May, June, and July.
Full Year Fiscal 2021 Guidance
Revenue is expected to fall between $5.83B and $5.91B, representing a minimum of 32.5% YoY growth.
- This would represent the strongest YoY sales growth since 2012, where Lulu reported sales growth of 37%. It is thought that ~$250M to $270M of FY21’s revenue base is to be generated from Mirror.
- It’s worth noting that Lulu’s Power of Three growth plan guided revenue growth in the low teens when it was put forward in 2019.
After a modest decline in e-commerce sales during Q2 (YoY), management asserts that positive growth should resume in the later two-quarters of FY21, as they pass the height of the covid-related channel shifts and demand.
After originally guiding for 40 to 50 net new stores in FY21, management has raised this assumption to a range between 45 to 55, with between 35 to 40 of those stores being opened in international markets.
The gross margin is expected to be between 1.5% to 2% greater than FY20, which would result in an FY21 gross margin of between 57.5% and 58%, making it the seventh-straight sequential year of margin expansion.
- This expansion includes a 0.5% negative impact from additional freight costs and should leave Lulu with between $3.35B and $3.42B in gross profit for a modest 36% YoY growth rate.
SG&A for the full year is expected to deleverage by between 0.3% to 0.5% relative to 2020. Drivers of the deleverage continued to include consolidation of Mirror for the full year and investment in Mirror brand building.
Adjusted diluted earnings per share to be in the range of $6.73 to $6.86.
- This assumes modest dilution from Mirror (between 3% to 5%) and excludes acquisition-related costs, as well as the impact of future share repurchases.
Capital expenditures are to be ~ $365 million to $375 million for 2021.
- The increase from 2020 ($241M) represents the additional investment in Lulu’s supply chain, digital expansion, new stores, as well as the inclusion of Mirror shop.
As someone who likes to own businesses they can understand well Lululemon ticks that box. With a relatively uncomplex business model, a well-loved and quality brand, and a management team that finally appears to be taking the business in the right direction, there is a lot to like here.
You may recall that in the July Edition of this segment I suggested Kura Sushi, the rotating sushi restaurant business, was a potentially great company trading at an unattractive price.
To me, it appears that Lululemon is a fantastic business run by a well-enabled management team, that offers up an attractive batch of catalysts across their international expansion and margin-plumping DTC business.
Having already demonstrated, for over a decade, that this business can consistently generate high returns on invested capital, utilise their retained earnings, and stack cash flow at an ever-increasing rate (relative to incremental sales growth), I find it amusing that they did all whilst apparently coasting along until 2018.
Only now, does it appear that Lulu is about to throw coal into the fire and really get moving.
Whilst the meteoric rise of firms like Nike and Adidas are the benchmark of what companies in this space can do, there is a boatload of other failures in this space that struggle to keep pace with the ever-changing trends of fashion. What is attractive today, might not be tomorrow.
Who’s to say that Lululemon’s attire will be so popular in 2030?
Something which helps me alleviate those concerns is that Lulu has been gradually covering more corners of the closet in recent years. No longer just a leisure apparel brand, a sizeable chunk of Lulu’s inventory now tailors to the casual non-sporting consumer with line items that would not look out of place in a fine dining restaurant on a Friday evening after work. Thus, Lulu is no entirely exposed to one clothing category, despite being known for their technical apparel.
In saying that, good quality technical apparel rarely goes out of fashion, which is perhaps why Nike has done so well. With their strong brand and high-quality garments, they have ensured they remain present throughout decades of shifting consumer tastes. Perhaps this is what Lulu is looking to emulate?
At a market cap of ~$55B today, the investor is certainly paying a premium relative to something like Nike. But then, the Lulu business has been and is expected to continue, growing faster than Nike for the better part of a decade now.
That too, Lulu’s business offers a significant superiority with respect to both gross and operating margins, relative to Nike.
Today, the investor is also purchasing a call option of sorts, within the Mirror business. Whilst I am not sure how successful this will actually be, the price paid suggests it’s a suitable risk/reward for Lulu management and a potential golden nugget within the existing business. Should it fail, it doesn’t necessarily destroy the LT thesis.
Personally, I acquired a 4% stake in Lululemon at a cost of $3334 per share in June of this year, as well as another tranche at $367 in August, leaving me with a cost basis of $356.
For me, I adore businesses that I can understand, as well as those which have a clear catalyst over the time horizon that I chose to adopt (typically 3Y to 5Y). As this is now a company I own, you can expect further updates each quarter.
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Lead Analyst at Occasio Capital Ltd
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