Interactive Investor

Not too late to own this exciting stock in great health

15th September 2021 08:34

Rodney Hobson from interactive investor

After an incredible pandemic performance, the potential for growing the business at a spectacular rate remains, believes our overseas investing expert.

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

Sales and expectations have soared at healthy lifestyle group Lululemon Athletica (NASDAQ:LULU). So, too, has the share price but it is not too late to consider joining in the fun.

Lululemon, based in British Colombia, Canada, began life in 1998 making yoga clothing for women and has expanded to producing a wide range of clothing and accessories for men and women based on the concept of healthy living. Its offering includes shorts, tops, and jackets for leisure and athletic activities such as yoga and running, bags, yoga mats, and exercise equipment.

It now has more than 500 stores in 17 countries and also sells direct to customers online. Sales are augmented through yoga studios, health and fitness clubs and also temporary outlets. 

Second-quarter results to 1 August were quite stunning. Net revenue rose 61% year on year from $902.9 million to $1.45 billion, driven mainly by a 142% bounce in sales at company-operated stores. While figures were distorted by store closures in the previous year, it is significant that total revenue was well up on the previous quarter and beat the comparable 2019 figure by 64%.
Improved margins meant that net income more than doubled, from $86.8 million to $208.1 million, taking earnings per share from 66 cents a year ago to $1.59 now.

Fears that the pandemic would disrupt store sales seem to have been unfounded. On the contrary, customers forced to stay at home more have embraced the idea of aspiring to a healthier lifestyle.

Stellar progress is set to continue. Lululemon opened another 11 stores in the quarter, taking the total to 534, and it expects third-quarter revenue to top $1.4 billion, well above previous expectations, and diluted earnings per share of about $1.33. For the full year, revenue expectations have been raised to around $6 billion and diluted earnings per share to around $7.20, both well clear of the consensus forecast.

Source: interactive investor. Past performance is not a guide to future performance

Lululemon has achieved the happy knack of raising awareness of its brands and inspiring loyalty among its customers while expanding its product lines and maintaining quality to draw in new customers. There is a strong emphasis within the company on product design and development.

To that end it has teamed up with sustainable materials producer Genomatica to create plant-based nylon to replace conventional nylon in its products. Phasing out its most used synthetic material will go down well with its image and its clientele.

Meanwhile Lululemon is stepping up its product range for men, who still account for only one quarter of total sales.

So far there have been no problems with the supply chain, although in the current economic climate that possibility should be borne in mind.

The company is on the expansion trail, having acquired MIRROR, an interactive fitness platform that allows Lululemon to reach potential customers in their own homes. This fits neatly into Lululemon’s policy of pushing its brands through local teams out in the community, rather than the more expensive traditional route of advertising through print, online and broadcast media.

Profits are being mainly ploughed into expanding the business and, while the company continues to produce stunning results, shareholders will not be complaining. However, there is still something to spare for a buyback programme, though not at the moment for a dividend. This is, therefore, a stock for those seeking capital gains rather than income.

Hobson’s choice: The shares have soared from $50 to over $400 in four years so the best chance to buy has long since gone. However, the potential for growing the business at a spectacular rate is still with us. Any fear that the end of the pandemic will stop the spree are misplaced. On the contrary, online sales, with higher margins, are likely to be the driver of future growth. Buy.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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