1 Stock to Buy for Its Winning Strategy in China

Wall Street seems to have fallen out of love with yoga pants and their well-known maker, Lululemon Athletica (LULU).

When the company began in Vancouver in 1998, Lululemon aimed to be the only premium, performance-based yoga brand in the market. In fact, its first retail space was located in a yoga studio. 

But, over the years, those form-fitting leggings (called Align and priced between $98 and $118) turned the brand into a status symbol.

Today, leggings are still a fundamental part of Lululemon’s business. The company sold a pair of Aligns every four seconds last year; they’re just one of many leggings styles available.

And while the women’s market in North America is still Lululemon’s bread and butter, the company is expanding successfully into two different markets. First, its move into China has paid off in a big way, with explosive growth.

We’ll have to see if the second move - into men’s fashion - turns out as well.

Let’s look at China first.

LULU in China

As recently as 2018, the yogawear maker had 10 stores in China, and was still trying to figure out how to operate its e-commerce platforms there. This year, it has more than 130 outlets and hit $1 billion in Chinese sales for the first time.

That put China on track to become its second-biggest market after the U.S.

So while other Western brands have faded badly in China in recent years, Lululemon has become a surprise hit. Sales in the first two quarters of this year grew by 40%. And Lululemon is selling more expensive items, at an overall pricing that's 20% higher than in the U.S.

As other Western brands scaled back in China, most of Lululemon's store openings this year actually were in mainland China. By 2026, HSBC estimates that the country will account for 20% of Lululemon’s total sales of nearly $13 billion globally. This would make it more reliant on China than Apple (AAPL), Nike (NKE), or Starbucks (SBUX) currently are.

Lululemon has become the third-largest foreign sports apparel brand in China, Morgan Stanley said last month. And it’s the leader among niche athleisure brands. Its $600 jackets and $150 yoga pants continue flying off shelves, even though there are many cheaper local brands selling copies of the company’s clothes for a third of the price.

A big part of the reason for Lululemon’s success is its strategy of tailoring items for the local Chinese market. Up to 35% of its China sales come from products tailored specifically for that market.
Highlighting Lululemon’s resilience to Chinese consumers’ new frugality, products priced at more than 1,000 yuan ($140) accounted for more than 40% of its Tmall (owned by Alibaba) sales in September, compared with just 10% in the same month three years ago.

Menswear has also become a significant growth driver, appealing to Chinese men who might once have seen Lululemon as mostly for women. Its new ad campaigns now focus on wellbeing for everyone.

Lululemon’s Move Into Menswear

Besides China, Lululemon is moving into menswear globally.

Calvin McDonald, the company’s CEO since 2018, thinks now is the time to increase its male customer base. His goal is to quadruple its men’s business by 2026. This is part of a broader strategy, where Lululemon seeks to “double its overall business to $12.5 billion, including doubling e-commerce sales, and quadrupling international sales, from 2021-2026.”

For 2024, the company expects annual revenues to hit about $10.3 billion, up 8% from 2023. In the second quarter of this year, women’s products made up nearly two-thirds of sales.

However, menswear is growing faster. In the second quarter of 2024, men’s sales grew by 11%, compared to a 6% rise in women’s sales.

In womenswear, Lululemon built its reputation in yoga before expanding into other categories. But in menswear, its offering is already broad — it currently offers outfits for running, golf, tennis, hiking, and yoga, as well as casual wear.

Buy LULU

The moves into China and menswear make sense. Lululemon is approaching a ceiling for womenswear in the U.S.; growth in North America virtually flatlined in the second quarter of this year, sending the stock price down substantially. While the company still has pockets of growth, it won’t be able to manage the same kind of growth in North America it has had in the past.

I see China growing 35% or more annually over the next five years. In the 2023 fiscal year, sales in mainland China grew 67% year-on-year.

The company continues to enjoy balanced revenues, split roughly 50/50 between e-commerce and brick-and-mortar stores, which makes it resilient in any economic environment.

Finally, Lululemon continues to maintain its fortress balance sheet. It ended the 2023 fiscal year with $2.2 billion in cash and equivalents, and no long-term debt outstanding.

The company repurchased 1.5 million shares for $555 million in the 2023 fiscal year and announced that it raised its buyback program again by $1 billion, and now has over $1 billion remaining under its current program.

Add its strong financials to what I believe will be a winning growth strategy, and LULU is a buy under $330.

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On the date of publication, Tony Daltorio did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.