Frustrated with the way your pants fit during your yoga session? Maybe you should check out the latest “anti-ball-crushing” men’s yoga pants from Lululemon Athletica inc. (NASDAQ:LULU).
Shares of LULU traded 11% higher on Tuesday following the company’s first quarter earnings report. Investors appeared to be particularly impressed by the 19% growth in LULU’s men’s division. Branching out into the men’s athletic apparel market could be a significant growth opportunity for the traditionally female-focused apparel company.
For the first quarter, Lululemon reported earnings of 34 cents per share, beating analyst expectations by a penny. Compared to the first quarter last year, the company grew earnings by 162%.
“We drove positive trends in traffic, conversion, and brand engagement, along with a continued acceleration of our e-commerce business.”
~Laurent Potdevin, CEO
Direct to consumer sales (primarily online purchases) increased 27% to $83.6 million. This portion of revenue represented 19.7% of total revenue for Lululemon this quarter. Building out the direct to consumer business is important for the company because these sales typically have lower overhead expenses and therefore generate higher profit margins.
Lululemon also increased guidance for the year to a range of $1.86 to $1.91 on expected revenue between $1.97 billion and $2.02 billion.
The athletic apparel company has benefited from a widespread consumer health trend. Affluent consumers in particular are willing to pay premium prices for organic food, gym memberships, and workout gear. As this trend continues, Lululemon should be able to maintain a healthy growth trend.
Competing With the Big Dogs
Lululemon’s aggressive entry into the male sports apparel market has potential to put the company in direct competition with heavyweight brands such as Nike Inc. and Under Armour Inc.
In the last quarter, Lululemon generated net revenue of $423.5 million. This is well below the $805 million generated by Under Armour and well below Nike’s massive $7.5 billion in revenue. Of course these numbers don’t include revenue from apparel companies like Reebok, Russell Athletic and many smaller retailers.
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Clearly, Lululemon has room to grow revenue materially without posing a material threat to the industry titans. And for now, LULU appears to be focused on serving the niche yoga area of the market. But as the company begins selling more gear that is appropriate for running, tennis, or other sports dominated by the established guard, competition could heat up.
The good news is that the industry appears to be strong enough to support a large number of brands. As global demand for athletic apparel continues to rise, a large number of competitors should be able to thrive. Over the past several years, investors in Under Armour and Nike have fared quite well as shown in the chart below.
Other Positive Trends
In addition to the consumer trend towards health and fitness, there are two other tailwinds that should benefit Lululemon, Under Armour and Nike.
First, an improving employment market in the US should help boost consumer spending. For the month of May, the Labor Department reported 280,000 new jobs were created – well above the 220,000 that economists were expecting. According to the same report, average hourly earnings rose 2.3%.
On Tuesday, the Labor Department released another report showing that the number of job openings hit a new high of 5.4 million positions.
A robust job market with plenty of available positions is good news for retail stocks. As consumers become more confident with the job market, spending should pick up. Retail companies across the board should do well in this environment.
A second tailwind comes from low oil prices.
As consumers spend less at the gas pump, the savings should eventually lead to higher consumer spending.
So far consumers appear to be skeptical of lower gasoline prices. Savings haven’t yet translated to more retail spending. As oil moved back up above $60 per barrel, some worry that gasoline prices will move back toward the high prices seen last year.
We’re on record stating that we believe oil prices will remain under pressure. Once oil prices back off (or simply remain near $60), we should see consumers open their wallets, leading to stronger retail sales.
A healthy financial environment for consumers, coupled with a healthy physical trend for professional and amateur athletes should bolster the bullish trend for these three athletic apparel stocks.