What Lululemon’s Earnings Say About the Strength of the Athleisure Trend

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Athletic apparel retailer Lululemon Athletica Inc. (LULU) released its Q4 2018 earnings report on Wednesday, and the numbers surpassed analyst expectations. Investors responded with enormous enthusiasm, boosting the stock to record highs in after-hours trading.

Despite increasingly stiff competition, Lululemon remains a dominant force in the relatively new and rapidly growing athletic leisure – or athleisure – market. It’s important for investors to consider the company’s earnings through that lens specifically, as the future health of the athleisure market is ostensibly equivalent to Lululemon’s own market performance down the road.

Let’s take a closer look at the firm’s newly released financials – and what they indicate about this burgeoning retail subsector…

The News

Luluemon’s Q4 earnings beat estimates on the top and bottom lines, with same-store sales growth – a closely watched metric in the retail sector – perfectly matching expectations.

The company posted earnings per share (EPS) of $1.85, marking a 39% increase from the $1.33 reported in the year-ago period and surpassing Wall Street’s $1.74 estimate by 6.3%. Revenue clocked in at a sturdy $1.17 billion, the first time the firm has surpassed the $1 billion mark. That Q4 revenue was up nearly 26% year-over-year from $929 million and beat the $1.15 billion estimate by 1.7%. Same-store sales – or sales at stores open for at least one calendar year – grew 16% from Q4 2017, which met analyst expectations.

Lululemon CEO Calvin McDonald enthusiastically stated in a press release that the company “delivered one of its strongest years yet, a result of broad-based strength across the business.” The firm cited its expansion into men’s apparel as a primary source of the massive earnings success, with COO Stuart Haselden explaining that Lululemon is set to become “a dual gender brand and that our men’s business can ultimately be as big as our women’s.”

How Investors Reacted

Market participants rallied behind the earnings report and pushed LULU shares up 12.6% from $143.56 on March 26 to $161.67 as of 8 p.m. Wednesday. If the stock were to close at that after-hours level on Thursday, it would be the best settlement since Sept. 28 when shares closed at an all-time high of $162.49. Accounting for the post-market activity, LULU stock is now up 33% this year since closing at $121.61 on Dec. 31.

The Bigger Picture

Understanding Lululemon’s success boils down to understanding athleisure’s success, which has been stunning in recent years.

Athleisure products have largely caught on in just the last five years, as yoga pants, mesh tees, and leggings continue to surge in popularity. According to CNBC, the U.S. athleisure market was valued around $46 billion in 2016. That value is expected to reach $83 billion by 2020, a stunning 80% increase from 2016. On a global scale, it’s set to hit $350 billion.

In terms of the broader apparel industry, athleisures is slowly eating up a bigger portion of the pie. A study conducted by research firm NPD Group last year found that athleisure accounts for 24% of all apparel sales. Marshal Cohen, NPD’s chief retail industry advisor, said the trend wouldn’t fade away due to the fact that “when you have comfort and function combined with fashion it’s difficult to go back to anything else on a regular basis.”

And just like the athleisure trend, Lululemon shows no sign of stopping in the face of multiplying competitors. Firms like Outdoor Voices and Bandier have sprouted up recently, but none have the clout and brand recognition that Lululemon currently takes advantage of.

The only competitor with any chance of becoming a real threat is The Gap Inc. (GPS), which announced plans last October to double down on athleisure products by launching Hill City. The new brand features casual wear and athletic wear, including shorts, hoodies, light jackets, leggings, and running pants.

However, Gap’s own growth prospects may slow down its entrance into the athleisure market. After all, the company announced plans last month to shutter 230 retail locations over the next three years due to lackluster sales from many of its brands.

Looking Ahead

Lululemon continues to succeed where other brands have not: producing quality products with a focus on sporty fashion rather than just sports themselves. Nike is suffering from its broader retail strategy, which was made abundantly clear in its latest earnings that reported weak North American sales. Additionally, Under Armour’s attempts to make fashionable athletic products always seem to founder, particularly the Steph Curry shoe line that bombed back in 2016.

All things considered, Lululemon is the dominant investment to have in a market that’s poised to keep growing at an explosive pace. Investors should consider moving into LULU stock but should also buy within their means given the expensive, currently lofty share price.

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