Neglect the loophole, Lululemon is healthier retail stock

Athleisure has seen tailwinds due to the impact of the COVID-19 pandemic as people spend more time at home and work remotely. Some retailers are better positioned to benefit from the trend. lululemon athletica (NASDAQ: LULU) and Athleta, part of gap (NYSE: GPS)are popular retailers of both apparel and wellness products. Sales for Athleta, the standout segment within Gap, rose double-digit in the last quarter. However, Lululemon has better growth prospects.

Here are three reasons Lululemon’s positive performance is likely to continue, and why it’s the better stock.

Image source: Lululemon.com.

1. Lululemon should continue to thrive after COVID-19

While no one is sure when COVID-19 will subside, consumers are likely to continue to prefer comfort and exercise even after they return to normal. According to Allied Market Research, the global sports market is projected to reach $ 257.1 million by 2026, up from $ 163.7 million in 2019, an average annual growth rate (CAGR) of 6.7%.

Lululemon’s business has picked up momentum – the company recently raised its previous forecasts and is now forecasting revenue to hit the high end of its expectations for mid-to-senior teenagers, and earnings per share to the high end of its mid-single digits customized. CEO Calvin McDonald pointed to the strength during the holiday season and reiterated confidence in growth in 2021.

For the third quarter (ending Nov. 1), Lululemon saw net sales increase 22% year over year, with gross margin increasing 100 basis points (or 1 percentage point) to 56.1%. Adjusted earnings per share were $ 1.16, beating last year’s $ 0.96 and consensus estimates of $ 0.88.

While Athleta is also in a good position to capitalize on the growth of the sport, parent company Gap’s revenue expansion has been slower. Gap’s most recent quarterly revenue (for the period ended October 31) was unchanged from last year. Earnings per share were $ 0.25 compared to $ 0.53 last year, below consensus estimates of $ 0.32. The company issued a forecast for flat to slightly higher net sales year over year for the fourth quarter.

2. Lululemon focuses on product innovation

Product innovation is key to Lululemon’s growth strategy. The company plans to launch additional products in 2021 that offer technical innovations in the “Science of Feel” area that have been well received by customers. Commenting on customer preference for innovative, high-quality sporting goods in the third quarter, McDonald said, “Our guests are demanding a technical product that offers comfort and versatility as they spend more time working and sweating from home. ” The company is also launching a 3-D yoga mat in 2021, “one of the first in the world to feature a textured surface to better facilitate body alignment during exercise,” said McDonald.

Lululemon has been heavily focused on the men’s business with the aim of doubling it by 2023. Currently, this segment accounts for around 24% of total sales, while the women segment accounts for around 70%. The company saw a sequential improvement in men’s business in the third quarter versus the second quarter, fueled by stock gains and a positive response from consumers.

Athleta has also launched new products with technical features but is less focused on consistent product launches and updates. In 2019, Athleta announced that 60% of its materials were made from sustainable fibers as part of a new initiative. While Athleta sells high quality sporting goods, there are no consistent new product and feature offerings like Lululemon.

3. Lululemon has a strong brand that is resonating with consumers

Athleta also doesn’t have the same brand strength and awareness as Lululemon. As evidence of Lululemon’s leading brand, the company posted its “strongest quarterly market share gain in recent history” in the third quarter with a 1.4-point share of the US adult active apparel market. This is based on data from the NPD Group.

Lululemon continues to invest in its brand reach. In September, the company launched a popular membership program in some cities. Chicago, Boulder and Denver are now fully occupied due to the high demand. The program offers members local and digital fitness classes. as well as local events, special shopping promotions, and exclusive Lululemon gear. There are also workshops such as the virtual coaching on emotional fitness by brand ambassador Gabrielle Bernstein, in which 500 people took part.

The acquisition of home fitness company Mirror in June 2020 gives Lululemon more branding potential. Mirror offers live fitness classes for its wall-mounted device. By offering interactive training platforms, Lululemon products and the brand are presented to a targeted community of people who value fitness.

Investors should consider buying Lululemon shares through Gap. Lululemon’s execution is harsh and can flourish during and after COVID-19. As consumers resume their in-store purchases in greater numbers, Lululemon is likely to see a spike in sales, aided by its innovative products and well-implemented membership and engagement strategies.

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