Investment Opportunities

Is Lululemon (LULU) on the Path to Profitability?

Yoga pants aren’t the only reason sports-apparel maker Lululemon Athletica Inc. (Nasdaq: LULU) posted strong second quarter profits, but they were a big part of it.

The company reached $0.33 per share on top of analyst estimates of $0.29 per share. In addition, the company topped revenue estimates of $376 million with $390 million.

The timing is good, as Lululemon stock has taken a beating over a few past flubs. Last year, the company recalled 17% of the yoga pants it sold for becoming see-through over time. Still, it’s good news for the om-oriented clothing maker aiming to take a chunk out of the sport clothing market, expected to reach $126.30 billion by next year. But Lululemon stock comes with concerns, as well.

 The Good, the Bad and the Bhava

The earnings report was welcome news to shareholders, but the lower net income reports brought them back to reality. Lululemon’s income fell from $56.5 million last year to $48.7 million this year.

Lululemon may have pioneered the yoga pant market, but is now joined by capable competitors that offer trendy clothing at lower prices. They include The Gap Inc. (NYSE: GPS), Nike Inc. (NYSE: NKE) and Under Armour Inc. (NYSE: UA).

At the same time, 30% gains in Lululemon’s online revenue were headed off by a 5% decrease in retail store revenue. Its revenue of $390.7 million was a result of a slight rise in U.S. sales and a slight drop in Canadian sales.

In an attempt to bring back the returns of its heyday, Lululemon is rapidly expanding. By 2017, it will construct 23 stores in new markets. These include London, Singapore, Hong Kong and others. Company reps say the first location in the Middle East will open before the end of 2015.

 Maximizing Profit Flexibility

Despite the strong results, Lululemon stock is still down 35% from last year. In an effort to seek out new profit centers, the company has been aggressively pursuing younger consumers.

Lululemon created Ivivva in 2009 to target girls from 4 to 14 years old. Like the company it sprouted from, Ivivva branches also host classes to keep children (and parents’ purse strings) engaged.

The concept has worked at the 34 Ivivva stores and 23 “showrooms” across the U.S. and Canada. There, sales grew by 36% from August 2013 to August 2014. This year, Lululemon plans on opening 10 more full stores and 20 additional showrooms, said CEO Laurent Potdevin.

It’s just one of the strategies Potdevin created to put the brakes on Lululemon’s stock losses.

“We are early in the process of getting back to consistently delivering amazing product to our guest…” Potdevin said, during a conference call.

The company has also fallen back on the word-of-mouth advertising from its 1,500 “brand ambassadors.” These spokespeople act as nexus points between consumers, Lululemon products and the active lifestyle the company promotes.

Lululemon has also opened up a chain of stores for males following the 14% spike in male sales through the first and most recent quarter. The first store exclusively for men will open up this autumn in New York.

In fact, Lululemon’s founder, Chip Wilson, is male.

Stretching Into Uncharted Waters

Based on the track record of Lululemon’s male products, the company could be looking at a sizeable boost in sales.

But Lululemon might already be topped out on all-male sales. Yoga is rising in popularity, but only 18% of yoga participants are male, according to Fortune. If the male store concept fails to impress, it could mean a bumpy trip down memory lane for a company that knows misfires all too well.

Lululemon’s diverse product lineup makes for appealing stock fodder, but the company may have taken the male clothing concept too far, too quickly.

Wait to see how male consumers react first. Just as Lululemon’s yoga pants became more transparent over time, so will profitability.

Articles by
Related Articles