1 Sports Apparel Stock Set To Keep Soaring?

Few investors know that sports apparel giant, Lululemon Athletica, was originally founded as a design studio by day and yoga studio by night. Fast forward to today, and the company is nothing short of a global phenomenon that last week made it into the S&P 500 club.

But what’s on the horizon now for this extraordinary apparel firm? Has it hit peak valuation or is the sky the limit?

Key Points

• Lululemon Athletica joined the S&P 500 index, replacing Activision Blizzard, leading to a 10% spike in Lululemon’s stock price on huge volume.
• The athleisure market is projected to grow to $257 billion by 2026, offering ample room for revenue expansion.
• The company’s stock has seen about a 25% growth year-to-date, with a majority of Wall Street analysts leaning toward a ‘Buy’ recommendation. 

Lululemon Joins the S&P 500

Lululemon’s stock hit its highest level in almost two years last week on news that the company is joining the S&P 500 index, and replacing game manufacturer Activision Blizzard, which recently finalized its merger with Microsoft.

Joining the S&P 500 is no mean feat, and often results in significant demand for a company’s stock, primarily because exchange-traded funds (ETFs) tracking the index are mandated to buy into new additions.

In the case of Lululemon, this translated to a 10% single day spike in share price an nearly 10 million in trading volume, approximately 7x the daily the average.

Lululemon’s valuation now crossed above $54 billion, a figure that is 4x larger than the minimum needed for inclusion. Moreover, this is also a testament to its rapid revenue growth just shy of 20% versus last year, and all despite the turbulence in the apparel industry.

Peloton Alliance

To add to the good news, Lululemon announced a five-year partnership with Peloton. Under this collaboration, LULU will be the primary athletic apparel provider for Peloton, while some PTON instructors will also become Lululemon Ambassadors. This strategic alliance could open up new revenue channels and create an economic moat that rivals will struggle to disrupt.

The athleisure market is expected to reach a size of over $250 billion within 3 years, to the two firms combined have ample opportunity to make significant inroads in further capturing market share.

The Mirror Misstep

While Lululemon has grown at a rapid pace over the past decade, it has also experienced a few speed bumps along the way.

For example, three years ago, Lululemon acquired Mirror for half a billion dollars. The acquisition turned out to be a flop because it did not integrate well into Lululemon’s ecosystem, and the company has since halted further Mirror sales.

Although it didn’t pan out, the acquisition did signal that management is willing to be acquisitive to accelerate revenue growth through non-traditional means.

Wall Street’s Opinion

Overall, Lululemon is up about 26% year-to-date and analysts remain bullish with an overwhelming majority of the 33 covering analysts rating the stock a Buy.

Nonetheless we’ll note that analysts consensus fair value sits at $427 per share, in line with the current price level, suggesting the stock may be close to fully valued.

And it cannot be overlooked that, although Lululemon has consistently posted strong numbers, broader economic conditions could impact consumer spending and impact growth moving forward.

Final Thoughts

While Lululemon has transitioned from a simple yoga apparel retailer to a diversified athleisure powerhouse, its recent inclusion in the S&P 500 highlights its strong performance and potential for future growth.

With strategic partnerships like the one with Peloton, the sky is the limit for Lulu but perhaps a pullback is best to build in some wiggle room.