Can the yoga pants that have become a middle-class label in China promote Lululemon to rise?

Lululemon is jumping out of the box. In the first quarter of 2021, its men's product net income increased by 114.1% year on year. In the past fiscal year, the growth rate of the number of Chinese stores was the highest in the world, reaching 44.7%.

The big winner during the COVID-19 pandemic, Lululemon (LULU), seems to have lost its aura recently.

From the beginning of this year (July 2), Lululemon's stock price has risen by 5.87%, which is far from last year's 50% and 2019's 107% stock price increase. It even fell below US$300 in March until it has recently pulled back. Rose, still below the 52-week high of $399.9.

Who is Lululemon? For mass consumers, this is still a somewhat unfamiliar name, but for urban girls who love fitness around the world, it already represents a way of life. So they are willing to buy a pair of Lululemon yoga pants at a price much higher than that of Nike sweatpants, and even continue to buy its new products, just like buying a bag. Driven by Hollywood stars and fitness enthusiasts, it has also broken the circle and become a fashion item, increasingly moving from the gym to daily life. Therefore, Lululemon is also known as the "Hermes in yoga clothes" and has successfully stood at the top of the chain of contempt for yoga clothes. In China, it has even become a middle-class label.

Since its founding in Canada in 1998, Lululemon has seized the increasingly popular fitness trend and expanded rapidly. Although there is still several times the gap between the previous revenue scale and Nike and Adidas, the gap with Anta is the narrowing-its business in 2020 The revenue reached 4.4 billion US dollars, 1 billion US dollars less than Anta, and the difference between the two in 2019 was about 1.2 billion US dollars.

In the capital market, Lululemon’s stock price is already 20 times the issue price of US$18 when it went public in 2007, and has surpassed Adidas several times in the past year to become the second-largest sports brand by market value. It almost wants to subvert the ranking of global sports brands. Bit.

However, since the beginning of this year, Lululemon's stock price has lost the momentum of surging ahead in the past two years. The closing price as of July 2 is 368.47 US dollars. The year-to-date increase of 5.87% lags behind Nike, Adidas and Anta, and the market value also lags behind them.

Will Lululemon's $46 billion market value with a pair of yoga pants be a flash in the pan?

Unlike the dull stock price performance over the past six months, the company's latest quarterly report intuitively reflects the growth of the business. According to the financial report for the first quarter of fiscal 2021 as of May 2, Lululemon's revenue was US$1.226 billion, an increase of 88% from the US$652 million in the same period last year. The gross profit margin was 57.1%, compared with 51.3% in the same period last year; net profit was US$145 million, compared with US$28.63 million in the same period last year, an increase of 406% over the same period last year.

The Chinese version of Barron believes that if Lululemon can maintain a high margin advantage in sports brands and yoga segments, and make breakthroughs in the Chinese market, men’s products, home fitness and second-hand markets, the company’s share price will remain in the long run. Will rise further.

1 Fundamentals can only be achieved by maintaining high gross profit

Compared with similar competing products, Lululemon has taken high-end positioning from the beginning. On the one hand, Lululemon has made a fuss about product fabrics and developed several patents to create clothing that is more suitable for yoga training. On the other hand, its product tailoring focuses on highlighting the female figure, and the use of lines, colors, and fancy styles are relatively simple. This atmospheric design has strengthened the brand's fashion degree and has become a popular item sought after by many fashionistas.

The price of Lululemon is almost twice as high as that of similar products. Ordinary consumers will stop, but the premium price of the product has brought high gross profit to the leader in the field of yoga sportswear and has become one of its biggest competitiveness. The 2020 fiscal year annual report shows that Lululemon's gross profit increased by 11% to 2.5 billion U.S. dollars, and its gross profit margin rose to 56%. This is because Lululemon relies more on self-operated channels than Nike and Adidas rely on distribution channels. On the other hand, its products are priced high, and there are few discounts, which pushes up profit margins.

Compared with the top two sportswear companies in market capitalization-Nike and Anta, Lululemon has maintained an advantage over the past ten years.

With the comfort and fashion sense of the product, Lululemon's main sports and leisure style (Athleisure) has become the norm for many people during the epidemic, and will remain popular in the post-epidemic era.

Simeon Siegel, an analyst at BMO Capital Markets, told Barron’s: “The comfort of clothing will be preserved. Once you feel comfortable, it’s difficult to go back to the past. With health and fitness Sports become more and more important, and the importance of sports and leisure clothing that is closely related to it will also increase." Siegel believes that this change in consumption habits will be maintained for a long time.

Therefore, Lululemon's future growth is inseparable from its core gross profit margin. If its performance can maintain or exceed past levels, it will constitute a long-term positive for the company's stock price.

To do this, Lululemon is not without challenges. In 2019, Nike announced its entry into yoga products and launched a yoga series before the epidemic, with prices ranging from RMB 200 to RMB 600. The market generally believes that Nike's move is to reveal the lemon, and does not want to miss the cake of the yoga segment. At present, Nike's overall advantages are more obvious whether it is market size, supply chain, distribution channels, or product prices. The cluster effect helps Nike gain a firm foothold in the competition against Lululemon.

However, Lululemon has its own way of digging into gross profit. Just as some people said bluntly that "Lululemon's only drawback is expensive", the company's high pricing strategy keeps some consumers out of the door. Lululemon is looking for ways to catch these consumers who are blocked from the door.

This year, the company announced a trade-in and resale program called "Lululemon Like New", where consumers in California and Texas can exchange old clothing for electronic gift cards. The recovered clothing will be resold on Lululemon's official website. Lululemon said that all recycled clothing will be cleaned, and those that do not meet the quality standards will not be sold again.

Roxanne Meyer of MKM Partners told Barron’s that the data showed that the demand for Lululemon’s products in the second-hand market is already high. If Lululemon can further open the second-hand market, a new mode of operation and focus will be in progress. The ability of high-end products can create more demand for them.

Part of these demands stems from new customers who believe that Lululemon's new products are overpriced. The price of second-hand goods is more reasonable, and the quality of the product itself is excellent, it is easy to win new customers. The other part comes from existing customers. Meyer believes that customers who conduct second-hand transactions with their own clothes are likely to be attracted to buy more goods. The last part comes from young consumers who pursue environmental protection concepts and brand identity. The investment bank Piper Sandler’s semi-annual consumption report pointed out that in the spring of 2021, second-hand stores and consignment stores jumped from 23rd to 10th in the list of teenagers’ favorite brands in the spring of 2021.

According to estimates by Jefferies, an investment bank, the US second-hand market's annual sales are currently close to 30 billion U.S. dollars and will continue to grow in the next ten years, accounting for about 15% of the total US apparel market.

2 The growth of the Chinese market has just begun

Compared with the mature North American market, Lululemon is still a "new generation" in China. However, on the streets of China, yoga pants printed with a logo similar to the shape of the Greek letter "Ω" have appeared more and more frequently, showing that the company is constantly infiltrating the Chinese market.

From the perspective of offline stores, Lululemon has the fastest store expansion in the Chinese market; of the 30 newly opened stores in the world, 17 are located in China. Lululemon Nuggets' ambitions in the Chinese market can be seen.

For Lululemon and its competitors, the importance of the Chinese market is self-evident. Take Nike, which has been deeply involved in the Chinese market for many years, as an example. The sales growth rate in the Chinese market has been twice its global growth rate. Even in the fiscal quarter ending on May 31, Nike’s sales in China encountered Waterloo, but throughout the fiscal year, China’s 24% sales growth was still ahead of the global growth of 19%.

In terms of the number of stores alone, Lululemon is still a company rooted in the North American market. As of January 31, 2021, Lululemon's U.S. stores accounted for 60.5% of the total global stores, while China's accounted for only 10.6%; but in the past fiscal year, the growth rate of the number of Chinese stores was the highest in the world, reaching 44.7% This shows that Lululemon is fully penetrating the Chinese market.

To adjust its regional business focus, Lululemon's third major goal is to quadruple its international business from 2018. Looking at the Chinese market alone, Lululemon can also maintain the growth of China's business through online channels.

According to the National Bureau of Statistics of China, the scale of online shopping transactions in China from 2015 to 2020 has shown a continuous growth trend, and the growth rate has continued to remain above 10%. China's mature e-commerce market and online shopping environment coincide with Lululemon's channel strategy.

Lululemon’s main sales channels are offline stores and direct-to-consumer (DTC) e-commerce channels, including official websites, mobile apps, e-commerce platforms and other channels. The fiscal year 2021 first-quarter report shows that direct-to-consumer net income increased by 55% to US$545 million.

Lululemon believes that the doubling of net income on DTC e-commerce channels is mainly due to "increased traffic, increased conversion rates, and increased value of each transaction."

Judging from the quarterly report for the first quarter, online and offline businesses are equally divided, with net income accounting for 44.4% and 43.8%, respectively. From a longer-term perspective, the recovery of offline direct store channels in the first quarter of fiscal 2021 stems from the recovery of physical retail stores in the late period of the epidemic. The growth of direct-to-consumer channels is the backbone that cannot be ignored.

Lululemon stated in its fiscal 2020 annual report that before the epidemic, consumers' shopping preferences had begun to shift to online platforms. The epidemic has further accelerated the pace of change, leading to a "significant increase in website and mobile APP traffic." In the next fiscal year, Lululemon expects that the year-on-year growth rate of net income from DTC e-commerce channels will slow down, but its growth trend will not change.

In 2018, Lululemon proposed the goal of doubling its e-commerce business by 2023 compared to 2018. By the time the 2020 annual report was disclosed, this target had already been overfulfilled ahead of schedule.

Despite the potential for online and offline channel expansion, Lululemon may still be unacceptable in China.

First, as mentioned above, Lululemon still maintains a high pricing strategy in the Chinese market. Although Lululemon has gained a large number of loyal fans in China, product prices and community-based operations are difficult for the brand to occupy more sinking markets. This has caused consumers who know Lululemon to have a high degree of brand loyalty to it, but it is difficult for people who do not know the brand to have the opportunity to know the company. Compared with "big and complete" competitors such as Nike and Anta, Lululemon's "small but fine" play is obviously not efficient enough.

Investors also need to pay attention to the fact that in the Chinese market, Lululemon will face challenges from local brands, including but not limited to MAIA ACTIVE, VFU, Lori, L RECNAVA, etc. Whether it is fabric, function, appearance, fashion aesthetics, many brands more or less covet the position of Lululemon. These brands often know how to cater to the tastes of Chinese consumers, and more importantly, the price of a single product is only half or less of Lululemon. At the moment when the so-called "national tide" becomes popular, local brands are more likely to emerge, which will affect Lululemon's layout in the Chinese market.

3 Product layout expectation to break through the inherent label

For Lululemon, people have two inherent labels-women and yoga. After experiencing the rapid growth last year, many people began to worry about whether Lululemon has enough capacity to maintain the high growth rate.

Regarding the first label “female”, many people mentioned that Lululemon’s brain-filled picture is that in a certain yoga classroom, female students maintain a uniform yoga posture; they are also neatly dressed. The yoga pants are simple, generous and outline the body shape.

Although this is related to the higher proportion of women among yoga practitioners, it cannot be denied that Lululemon's products are more oriented towards female consumers. In the first quarter of 2021, the company's net income from women's products accounted for 69.2%. In a short period of time, it is not easy for Lululemon to change the stereotype of the consumer market.

Lululemon is not willing to miss "his" economic opportunities. In the first quarter of 2021, its men's product net income increased by 114.1% year-on-year, higher than the 77.8% growth of women's products; the proportion of net income also increased from 19.6% in the same period last year to 22.3%.

Lululemon's growth in men's products will not happen overnight. As early as 2014, Lululemon's management saw the development potential of the menswear category and opened the first independent menswear store in Soho, New York. In the fiscal year 2019, Lululemon's men's product revenue increased by 34%, becoming one of the main growth areas. At that time, Lululemon CEO Calvin McDonald (Calvin McDonald) once said that the company's goal is to double the men's product business by the end of 2023.

The new crown epidemic has brought additional opportunities to Lululemon. Research by Roxanne Meyer, an analyst at MKM Partners, pointed out that during the epidemic, more and more men bought goods from Lululemon for the first time and spent more and more.

According to the company's 2020 annual report, Lululemon's revenue from men's products has a two-year compound growth rate of 27% from 2019 to 2020, which exceeds that of women's products by 23%. The annual report reiterated its plan to double the growth of its men's product business by 2023, which shows that it is trying to make up for its shortcomings.

Taking this step means that the hand-to-hand combat between Lululemon and Nike, Adidas and other sportswear brands in all categories will become a protracted battle. Whether it can tap new business opportunities in existing men's sports products will directly affect Lululemon's growth curve.

Regarding the second label "Yoga", Lululemon has been trying to weaken it. The biggest effort to pay for this is the acquisition of home fitness company Mirror for $5 billion.

The mirror is headquartered in New York, and in 2018 launched a technology mirror equipped with cameras and speakers. Consumers can watch live and recorded videos of fitness classes including strength training, aerobics, and yoga at home. training. The official website shows that a technology mirror is priced at US$1,495, and consumers also a subscription fee of $39 per month is required for the course.

The acquisition was completed on July 7, 2020, when the North American region was trapped by the new crown epidemic and offline gyms went out of business. The benefits brought by the acquisition of Mirror to Lululemon were almost immediate, helping Lululemon in the third fiscal quarter of 2020, excluding offline stores and direct-to-consumer sales, to increase 42% year-on-year net income to US$127.4 million.

Dana Telsey, an analyst at Telsey Consulting Group, considers the transaction "a bold but forward-looking strategy", saying it will "provide a source of incremental revenue and additional branding for Lululemon" Contact point".

However, as the epidemic eased and people returned to the offline fitness scene, some analysts were also cautious about this transaction that was completed during the most frenzied period of home fitness. On the other hand, Lululemon has not disclosed the number of subscribers of Mirror in its financial report so far. Therefore, compared with the short-term effect, the stamina that the acquisition of Mirror can bring to Lululeme is still unknown.

Lululemon's 2021 quarterly report pointed out that even if the gym reopens, its home fitness business is still expected to achieve revenues of 250 million to 275 million US dollars in fiscal 2021. Needham’s Rick Patel is optimistic about Lululemon’s long-term goal growth after the deal, and said that the company is “being out of the box and getting to the place where the puck is about to reach, rather than chasing it. The trajectory it has crossed".

In 2020, Lululemon's market value has surpassed Adidas several times, but this year, the company is experiencing a cooling-off period in the capital market. According to Wind data, as of July 2, Lululemon's market value was 47.96 billion U.S. dollars, less than one-fifth of Nike's market value. Its market value was overtaken by Anta Sports on June 17. From the perspective of the price-earnings ratio, Lululemon's price-to-earnings ratio (TTM) is 68 times, Nike (NKE) is 44 times, Anta Sports (2020.HK) is 78 times, and Under Armour (UAA) is 82 times.

Next, Lululemon's investors need to continue to pay attention: First, in the face of competition from its peers, whether Lululemon’s high-priced and high-margin approach is still effective; second, whether the acquisition of Mirror can broaden the company’s traffic channels, And improve the liquidity; third, whether the accelerated expansion of China's business can alleviate the company's over-reliance on North American business; and the seasonal impact of upstream raw material supply on the company.

Edward Yruma, managing director of KeyBanc Capital Markets, believes that one of Lululemon's advantages is that its brand "has become synonymous with this type of company and product." Once Lululemon proves its business capabilities, the stock price is set to rise further.

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