Bulls and Bears Battle: Lululemon

Shares of Lululemon have been outperforming the broader market this year, fueled by strong demand online, but with a valuation that's above its rivals, the company's share price continues to grow. Today, we'll look at the bulls and our case for Lululemon. Joining me today is Anita Bruinsma, Consumer Discretionary Analyst with TD Asset Management. Anita, let's start with the bull case. The first bull case is a great product category.

 

Lululemon's product category has really been on fire for the past several years and the pandemic has only served to accelerate this. I think there are two trends to look at here. One is the increasing interest in health and wellness. And we can look at proxies like rising gym memberships and an increasing interest in apps related to things like mindfulness and meditation as indicators of this increased interest in health and wellness. The seond is around athleisure wear. We see it everywhere, people wearing leggings and hoodies and sneakers to do their shopping and to meet up with their friends and now even to work. Lululemon's products, fit perfectly into both of these trends.

 

OK, talk about strong branding.

 

Amongst all the companies I look at in Consumer Discretionary. I think Lululemon has among the strongest brand and brand is very, very important with consumer discretionary companies. We have a metric, five metrics we look at to evaluate a brand, and one of them is authenticity. I think that's Lululemon. This is a very, very authentic brand. It has its roots in mental and physical health and wellness with its yoga background and embodies a set of values that I think a lot of consumers can really connect to. They demonstrate these values through their strong social media presence and also through offering, for example, free online yoga classes. I'll mention to you that this is a brand that is very traditionally strong with women. This is an advantage because a lot of the other athletic companies are trying to catch up on that front.

 

Finally, growth opportunities.

 

Well, Lululemon has had amazing growth over the past several years, but it still has more areas that it can grow in. I'll talk about three. One is on opening more stores. Lululemon stores are very productive, meaning they sell a lot of product per square foot, so they're very profitable. The company thinks that they have several more years of opportunities in terms of opening new stores. The second way it can grow would be in new categories. We know Lululemon as a yoga category, but it's done well recently in running, for example, and also in menswear. There are new categories that can still go into like swimming, for example. Also it's likely to get into the footwear market at some point. Then the third way that it can still grow is on the international side. The brand is very strong in the US and in Canada, but it has opportunities to grow still in Europe and China. In fact, the company thinks it can grow its earnings in those areas by about 30 percent per year.

 

We've talked about the bulls. Now the bear case.

 

Let's start with the demand for products.

 

Right. When a trend is working in your favour, that, of course, is really, really good. But when the trend turns in the other direction, of course, the opposite is true. I think as the world reopens and we have restaurants, people go to restaurants again, people having more formal occasions and parties. Of course, going back to the office, they're going to want to have dressier clothing. They're probably pretty full up at this point on their athleisure wear and their athletic wear. The other part of this is that the economy is somewhat weak and especially for the consumer as we have higher unemployment and lower consumer confidence. This is never good for a highly discretionary category like Lululemon.

 

Let's talk about the competition.

 

Athelic wear is a very competitive category. We have a whole variety of players in this category. You have the really big players like Nike and Adidas and then some smaller athletic players like Puma and Under Armour. Then you have those niche yoga players and then you have those general apparel retailers that have their own athletic line. The Gap and Old Navy would come to mind. There's really no shortage of hoodies and leggings to be purchased. The consumer just has a lot of choice and when the consumer has choice, this can put pressure on things like prices, and it means that a company like Lululemon really needs to keep innovating in order to stay on top of the trend.

 

Finally, valuation.

 

It could be that Lululemon stock has really had its run here. The stock is up about 50% so far this year. In fact, it's outperformed almost 95% of all the stocks in the S&P 500 index, including Netflix. Its valuation is high. It's higher than it has been historically and it's higher than its peers. I think the debate here is around can these winners continue to win or are we going to see this rotation into stocks that have underperformed during a pandemic and now are going to recover. In fact, we've already seen that rotation starting to happen. I think that could only accelerate as the vaccine is rolled out and the world reopens again.

 

We've heard the bulls and the case, Anita, how does all stood out for you?

 

Well, Lululemon is a great company and a great category, and I think its long term outlook is very good. But we are heading into an environment where the world is reopening and people's desires might change a bit. We may see this stock rotation so we could see some pressure on the stock in the near term. If you're a long term investor, like we are here at TD Asset Management, we will think that Lululemon is going to be a long term winner.

 

Anita, thank you very much for your insights and analysis.

 

You're welcome, Tony.