LULU is a lifestyle.

Lululemon (LULU) is no longer just a clothing company, it’s a lifestyle brand.

Investment Analysis: Lululemon Athletica Inc (LULU)
Summary: Strong Second Quarter – Reiterate Market Outperform Q2 2019

Solid second quarter and strong outlook, reiterate market outperform rating and $233 price target. Lululemon reported an EPS of $0.96 and revenue of $883m, beating estimates by 7.8% and 4% respectively. Lulu added an additional five stores in the past quarter and 45 new stores since Q2 2018. The outlook is strong with estimated revenue growth of 19% YoY and 22 new store openings in Q3. Lululemon repurchased 9.6 thousand shares in Q2 and has a remaining budget of $336m for share repurchases. Lululemon is anticipating a strong Q3 and Q4 driven by higher Men’s Sales and international revenue. We reiterate our Market Outperform rating and $216 price target, which assumes shares will trade at 40x our forward P/E estimate.

Men’s Sales and eCommerce revenue driving revenue growth in North America. Men’s sales are continuing to grow with a rate of 35% YoY. We recognize men’s sales as a key driver for revenue in North America and will continue to grow in the low 30’s in Q3 and Q4. eCommerce sales are gaining traction totaling 24.6% of all sales, we see eCommerce revenue accounting for 26% and 28% of total revenue in Q3 and Q4, respectively.

International sales grew by 34%, led by China, where sales saw a 68% increase. We see international growth as the primary driver to push total annual revenue past $4 billion. International growth will be primarily driven by the expansion in China and the store count will be doubling in China by the end of this year. Lululemon has an extremely positive outlook on international growth. We estimate international revenue will grow an additional 40% in the back half of the year. With trade tariffs likely getting implemented on Chinese goods, we see a potential impact on earnings through the end of the year. Management is optimistic and estimate a potential $.05 impact on EPS for Q3 and Q4 which are priced into our forward- looking earning.

Lululemon becoming a lifestyle company in addition to a clothing company. The Lululemon brand has become known and sought after. Lulu has done a fantastic job getting their name recognized, they host over 4k events annually and hold a 92% high-value guest retention rate. They are exploring new avenues in which to better grow their brand awareness. During Q2, Lulu opened its first experiential store in Lincoln Park, Chicago. The experiential store offer clothing, yoga classes, meditation, and a restaurant. Another was opened in Boston and more stores are set to open in FY20. The stores will gain a wider range of customers and help to push customer retention rates even higher.

Market risk. Lululemon has minor current exposure in China with just 6% of finished products falling under the anticipated tariffs. Another minor risk we recognize is the high price of Lulu products. A downturn in the market would result in a large reduction in lulu’s sales. With minor China exposure and falling under the “luxury good” category, we value Lulu a market risk investment.