Lululemon’s Overseas Strategy Pays Off in a Challenging Retail Environment

December 9, 2024 TruthUSA

Lululemon’s overseas strategy is paying off. The company is delivering strong sales in international markets that compensate for the continued weakness in the U.S. market.

This week, the Vancouver-based athletic apparel company reported top- and bottom-line financial results for the third quarter of fiscal year 2024, which beat analysts’ estimates.

Sales rose by 9 percent annually to $2.4 billion, while gross profit was $1.4 billion, up 12 percent. In addition, the company provided strong guidance for the fourth quarter.

Most of the sales gains came from overseas markets, with strong overall and comparable sales. Sales in the U.S. markets, however, lag, with comparable sales declining.

CEO Calvin McDonald cheered the company’s performance.

“Our performance in the third quarter shows the enduring strength of Lululemon globally, as we saw continued momentum across our international markets and in Canada,” he said in a statement accompanying the company’s third-quarter financial results.

“Looking to the future, we are pleased with the start to our holiday season, and we remain focused on accelerating our U.S. business and growing our brand awareness around the world.”

Lululemon’s success in overseas markets results from good planning and effective execution. Very few companies have consistently delivered in the athletic apparel market, where fashion and faddism quickly wane.

“Lululemon is not a company to be underestimated,” Michael Ashley Schulman, CFA, chief investment officer at Running Point Capital Advisors, told The Epoch Times.

“Nearly every Wall Street firm (notably except Jeffries and BNP Paribas) has substantially raised their price target on LULU shares following management’s report and an expansion of their robust share repurchase program,” he said, using the company’s ticker symbol.

Schulman thinks stronger than expected gross margins of 58.5 percent and upbeat full-year guidance underscore Lululemon’s operational agility and ability to maintain profitability, even amid U.S. softness and heightened competition.

“Investors and analysts seem to recognize the untapped potential in emerging markets broadly, men’s products, and under-penetrated categories like accessories,” he said.

At the core of the company’s strategy to raise brand awareness worldwide is the Power of Three ×2 growth plan developed five years ago to spread and maintain the word-of-mouth buzz for the brand. It includes introducing innovative products across sales channels, such as new product lines supporting yoga, running, and training activities, and an office/travel/commute category while pursuing new opportunities, such as self-care. In addition, the company fostered partnerships and communities across geographic regions.

Meanwhile, Lululemon has developed the Omni guest experience. It offers an integrated guest experience across channels, inspiring, provoking, and celebrating guests living a healthy and mindful lifestyle. This experience has made the demand for its products inelastic, translating into excellent pricing power and a higher top line.

In addition, Lululemon has expanded its reach to fast-growing international markets such as China, the region of Asia-Pacific, Europe, the Middle East, and Africa (EMEA), and online markets in North America, which has helped the company deliver solid third-quarter sales gains that made up for a shortfall in the U.S. market.

Wall Street was pleasantly surprised with Lululemon’s earnings report, sending its shares close to 16 percent higher during the regular trading session on Dec. 6.

Despite the significant gain, Lululemon’s stock, currently at $406 as of 11 a.m. ET on Monday, is trading at a deep discount to the company’s fundamental or intrinsic value, which stands at $473.92, according to Gurufocus.com estimates.

For the year, Lululemon’s shares are down 20 percent, compared to the 27.68 percent gain for the benchmark S&P 500 Index, and LULU shares have underperformed the popular index over the past five years.

That’s despite Lululemon’s excellent job in managing capital. As of Dec. 8, the company delivered a return on invested capital (ROIC) of 37. 77 percent, according to Gurufocus.com estimates. At the same time, its weighted average cost of capital (WACC) is 9.18 percent, generating excess investment returns (ROIC minus WACC) of 28.59 percent.

Most notably, Lululemon has maintained these high returns over the past decade, beating close competitors such as Nike. That’s thanks to the strength of its brand, which allows the company to charge premium prices for its products.

Then there’s its efficient organization that supports its long-term growth through the acceleration of product innovation and go-to-market strategies.

For instance, last May, Lululemon developed a new team of leaders from its merchandising and brand functions to scale its global and regional go-to-market strategies.

“Looking ahead, I am confident in the strength of our design, merchandising, and brand teams, and excited by how the new structure will enable us to solve the unmet needs of our guests in a more efficient, unique, and powerful way,” McDonald said in a statement last May when he announced a host of organization changes.

Jason DeLorenzo, the Wizard of Ops on YouTube, sees Lululemon following in Under Armour’s footsteps, but it must keep on innovating to maintain the brand’s buzz.

“LULU is a popular brand with a unique style of clothing that appeals to women,” he told The Epoch Times.

“I envision LULU will match the trajectory of Under Armour, where a company makes a unique and helpful clothing line but must expand and continually innovate to remain relevant. “

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