Report
David Swartz
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Morningstar | Narrow-Moat Lululemon Holding Its Edge by Stretching Beyond Women’s Leggings and North America

We think narrow-moat Lululemon has solid plan to expand its product assortment and geographic reach while building its core business. Our narrow moat rating is based on Lululemon’s intangible brand asset. Despite significant competition, we believe Lululemon has a competitive edge in key categories like yoga apparel due to the styling and quality of its products. We think Lululemon benefits from a major fashion trend and will continue to achieve premium pricing.We view the “Power of Three” five-year plan laid out at Lululemon’s April 2019 investor event as sound but unproven. Lululemon’s three priorities are product innovation, e-commerce, and market expansion. We think product innovation is critical as many companies, including no-moat Gap’s Athleta, market quality women’s leggings. We believe Lululemon will need to introduce new fabrics and technology to hold its popularity in this critical category. Lululemon also plans to expand its assortment in nascent categories like men’s (21% of 2018 sales) and new categories like footwear. While we believe these categories fit the Lululemon brand, they also bring it in direct competition with athletic apparel firms like wide-moat Nike. We expect Lululemon’s e-commerce will become increasingly important. We forecast Lululemon’s e-commerce revenue will increase to 40% of 2024 revenue from 26% in 2018 as the firm invests in new digital capabilities (such as buy online, pick up in store), introduces new product, and builds a loyalty program. As we forecast Lululemon’s e-commerce operating margins at 42% over the next decade, increased e-commerce has a big impact on Lululemon’s overall profitability. We see opportunity for Lululemon to expand outside of North America. Sales outside the region accounted for just 11% of total sales in 2018 but have more than tripled over the last four years. We believe Lululemon is building its brand overseas and has a large opportunity in markets like China, the second-largest activewear market. We forecast 2023 sales outside of North America will reach $1.4 billion (up from $360 million in 2018) and account for 25% of total sales on the strength of about 225 new stores and e-commerce.
Underlying
Lululemon Athletica Inc

lululemon athletica is a designer, distributor, and retailer of athletic apparel. Co.'s athletic apparel is marketed under the lululemon and ivivva brand names. Co. provides a line of apparel and accessories for women, men and female youth. Co.'s apparel assortment includes items such as pants, shorts, tops, and jackets designed for healthy lifestyle and athletic activities such as yoga, running, training, other sweaty pursuits, and athletic wear for female youth. Co. also provides fitness-related accessories. Co. primarily conducts its business through two channels: company-operated stores and direct to consumer. As of Jan 28 2018, Co. operated 404 stores.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
David Swartz

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