Lululemon Plunges 7% on Earnings. Is it Still a Buy?

September 10, 2020

Lululemon clothes stock

Lululemon Athletica Inc (NASDAQ: LULU), the Canadian yoga wear and athleisure firm, saw its shares fall over 7.4% on earnings that actually beat expectations. Here’s why I think it’s still a long-term buy. 

Tim’s Take:

Who hasn’t heard of Lululemon? The fashion-forward yoga firm has been a phenomenon since creating comfortable, stretchy clothing for your daily workout. 

It then expanded from that niche to designing and producing comfortable everyday wear, dominating the so-called “athleisure” market.

So what did investors hate about its latest report? It’s more likely a spillover from the sell-off in tech stocks recently because the numbers were, in my opinion, pretty solid.

Revenue rose marginally in the second quarter, up 3% to US$902.9 million – which is impressive given the operating environment and closure of Lululemon stores during a period of global lockdowns.

Even better, though, its online sales in the direct-to-consumer (DTC) channel rose a whopping 157% year-on-year. Building out its online capabilities and hawking its US$90 yoga pants via its e-commerce platform is a smart move longer term.

Yoga moat and a strong brand

Yes, Lululemon’s net income did shrink by about a third to US$86.8 million but the fact it’s still profitable is testament to the strength of its brand.

The company’s acquisition of stay-at-home fitness firm, Mirror, will also allow Lululemon to beat a path into the stay-home fitness market that Peloton Interactive Inc (NASDAQ: PTON) has been dominating.

I’ll be interested to see how that acquisition pans out and how the firm plans to integrate Mirror into its product offerings. However, even with shares falling over 7%, Lululemon is still up over 35% so far in 2020.

Quality companies will remain quality companies and nothing has changed that fact in Lululemon’s latest quarter. 

Zoom out and take a look at the company’s performance over the longer term for proof of that. Over the past five years Lululemon’s share price is up around six-fold.

For long-term investors, the recent dip is an opportunity to pick up shares of a top-notch apparel firm.

This material is categorised as non-independent for the purposes of CGS-CIMB Securities (Singapore) Pte. Ltd. and its affiliates (collectively “CGS-CIMB”) and therefore does not provide an impartial or objective assessment of the subject matter and does not constitute independent research. Consequently, this material has not been prepared in accordance with legal requirements designed to promote the independence of research. Therefore, this material is considered a marketing communication.

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Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.

He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.

In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.

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