lululemon athletica (NASDAQ: LULU) shares are up double-digits and have now doubled so far in 2018 after reporting another beat in the second quarter; revenue and earnings per share were up 25% and 97%, respectively. A handful of new store openings helped, but the big headline was a 20% increase in comparable-store sales — including a 47% increase in online sales.
After the bump, the stock trades at a premium multiple of 62 times trailing earnings and a forward multiple of almost 39. To keep business rolling and to justify the high valuation, the athletic apparel company wants to focus on two target customers: men and China.
Yoga pants for guys, too
The popularity of athleisure — clothing inspired by gymwear — has been a boon for Lululemon. While women’s yoga pants continue to be the best-selling and highest-profit items, expansion into other clothing like shirts and outerwear are at the heart of the company’s strategy to exceed $4 billion in annual sales by 2020.
Clothing for men could go a long way in propelling Lululemon past that mark. The men’s segment accounted for only 22% of sales last quarter, but that number is growing by double-digits. Men’s pants alone grew over 30% compared to last year. New clothing lines for outside of the gym are also growing, and targeted ad campaigns like Father’s Day back in June is getting the word out. Management said its email file grew 80% in the second quarter.
Headed into autumn, bigger-ticket items in the jacket and hoodie department will be released. It’s still early, but the company said online traffic is trending positive for the new merchandise and makes Lululemon’s top team confident that its clothing for men is converting new customers.
Online overseas appeal
International sales are the other pillar to Lululemon’s growth strategy, specifically China’s emerging middle class. The expectation is that a total of 40 new stores will be opened by year end, but as many as 25 of those will be in international markets with a focus on the world’s most populous country. At the end of the second quarter, there were a total of 415 Lululemon stores worldwide.
But why China? Comparable sales were up 50% in Asia during the second quarter, which includes a 200% increase in China’s e-commerce segment compared with 2017. A new store on China’s WeChat social media site contributed to the strong turnout. Granted, the lion’s share of sales occur in North America, so the Chinese business is benefiting from a small base. However, with that kind of momentum, that could soon change.
Because of fast expansion, Lululemon’s international business should start turning a profit later this year. That’s good news for investors watching the bottom line. The overall gross profit margin was 54% through two quarters of 2018. By comparison, Nike‘s (NYSE: NKE) gross margin was only 43.8% in its just-finished 2018 fiscal year. With overseas business starting to add to that number, it makes sense that Lululemon would stomp on the gas in its hottest market.
Lululemon’s premium-priced athleisure business is firing on all cylinders right now, and while yoga pants for the ladies are still driving results, look for other segments to start becoming more meaningful contributors in the near future.
Still, it’s worth noting the risks, here. The stock carries a lofty valuation that assumes growth continues at its current pace, and management has already raised its full-year 2018 guidance twice. If momentum slows down, experience elsewhere in the space suggests that shareholders should look out below. Nevertheless, with the company’s online strategy paying off at home and abroad, and athleisure only getting more popular, the athletic-wear company could have more room to stretch.
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Nicholas Rossolillo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Under Armour (A and C shares). The Motley Fool recommends Lululemon Athletica and Nike. The Motley Fool has a disclosure policy.