LULU started out as a modest performance wear shop inside a yoga studio in Vancouver. That was 1998. Two years later, management opened the first official company store, also in Vancouver. By 2003, the first U.S. store opened in Santa Monica, California. The upscale suburb of Los Angeles, adjacent to the Pacific Ocean with miles of beach-front sidewalks, was an inspired location. Wealthy clientele who were fitness fanatics were Lulu’s perfect customer avatar and in Santa Monica there were hoards of them.
The next year, Lulu opened its first storefront in Melbourne, one of Australia’s most populous cities. Those were the early days before the company’s successful IPO that kickstarted a bull run that has rewarded long-term shareholders with well over 1,000% returns on their originally invested capital. As the company has grown so too has its target market.
LULU products were originally designed for women, especially those who practice yoga. The brand became known for its yoga pants and leggings, made from a special fabric, Luon, which included a higher-than-average amount of nylon microfiber. The brand’s comfort and style, coupled with its pricey offerings created a cachet among consumers.
As the company expanded, management came to realize that male athletes were an untapped market. Today’s Lululemon not only sells athletic wear but also sweaters, jackets, underwear, hair accessories, yoga mats, water bottles, and personal care products. The combination has proven to result in explosive sales and a juggernaut share price that has seemingly defied gravity.
The Unusual Story of Lulu’s Founder
Founder Chip Wilson is a big fan of Ayn Rand and her objectivist philosophy. The company’s original shopping bags were emblazoned with “Who is John Galt?”, referring to the protagonist in Rand’s novel “Atlas Shrugged.”
But that’s not all.
Chip allegedly gave several alarming media interviews, leading company directors to instruct him to not speak to the press.
Then there were claims that Lulu clothes were manufactured with seaweed which supposedly gave wearers several health benefits. Those claims were retracted after a public outcry.
Wilson fostered a cult-like culture at Lululemon. He was big on mantras like “99 percent of sickness is due to stress” and trained store workers to intentionally eavesdrop on customers, then report back their findings to headquarters every two weeks.
Internally, he promoted the famous book, “The Secret”, and wove its philosophy into the firm’s culture, instructing employees to study the “law of attraction,” a belief that visualizing goals is key to attaining them.
Next up was the sheer yoga pants controversy. It became apparent that many of LULU’s popular yoga pants became see-through in certain yoga poses. This ended up with a product recall, and the stock went downward-facing dog for a time. In fact, the company lost so much money after that-$67 million to be precise-Wilson was forced out.
But that wasn’t the end of Lulu by any means.
LULU Bounces Back
With Wilson out, the company settled into a healthy growth path and today boasts stunningly good fundamentals and a host of investments, such as the 2020 acquisition of Mirror, an interactive mirror with camera and speakers for at-home workouts.
With a 41.26 percent return on equity, and a 25.69 percent EBIDTA, LULU has enviable metrics. Perhaps the most important of all is sales growth. What is surprising about Lulu’s top line is how consistent it has been. Even during the March 2020 market rout, when many companies struggled to sustain an upward sales trajectory, Lulu kept growing.
Sales growth has been impressive over the past number of fiscal years:
- 2018: 13.0%
- 2019: 24.1%
- 2020: 21.0%
- 2021: 10.6%
- 2022: 42.1%
And it’s not forecast to slow down any time soon. Top line revenues are estimated to continue rising year after year for the foreseeable future:
- 2023: $7.5 billion
- 2024: $8.6 billion
- 2025: $9.6 billion
- 2026: $10.7 billion
- 2027: $11.7 billion
What should contribute to top line expansion?
LULU has an aggressive growth plan, including the roll-out of a $39 per month membership program and continued focus on ecommerce sales. Just as RH, Costco and others have built highly successful loyalty programs, Lulu has its own plans to reward its best customers with a low-ish price for its largely price insensitive fanbase.
Examining the company through the lens of valuation, the fair value for the company sits at $364 per share. A selloff in share price under $300 would offer a compelling reward to risk ratio. For now, Lulu remains a watchlist stock to keep on the radar. The fundamentals are excellent but the price is a little too frothy.