Lululemon: 3 reasons it’s a safe bet on retail recovery

Lululemon Athletica just announced its Q2 results, missing revenue estimates and lowering guidance.

Its EPS came in at $3.15, better than the expected $2.93. These numbers aren’t as healthy as investors would have liked, but the stock went up despite the negativity.

Lululemon is fast becoming the type of stock that has everything going against it.

The company has worked hard at creating a strong brand and a unique moat. But it has all been going downhill. Anything that could go wrong for the company, has gone wrong.

Usually, a turnaround is easier when a company is struggling to the extent that Lululemon is.

Perhaps that’s why the stock went up, with people looking for signs of an easing economy that might help the company.

We believe the company’s stock price may have reached an inflection point, and there are multiple reasons why the stock could go up from here on, despite guidance that shows the current quarter will be just as bad as the previous one. 

Less competition

Lululemon has a distinct moat, and it has been able to distinguish itself from many other sports brands.

It focuses on using luxury fabrics for sportswear, which could be one reason why it only commands a 2.5% market share of the global sportswear industry based on revenue.

That market share may not look huge, but since it is carved out because of its niche status in luxury sportswear, it carries a strong moat.

However, recent entrants Vuori and Alo Yoga have disrupted the company’s business and challenged its moat.

The negative effects of these entrants seem to be already priced in, even though both these brands have not been able to erode the brand image and have only yet taken a financial market share.

LULU has successfully used social media to penetrate local communities worldwide.

The impact of that strategy wasn’t at first clear but since the company started facing competition, this aspect stood out. This is one reason why it will be hard to beat Lululemon.

Once the economy eases up, it could come roaring back on the strength of its ambassadors across the world.

The mistakes have already been made

Lululemon’s stock was already suffering from a slowing retail economy when it messed up its release of the "Beezethrough" collection big time. The new line failed to make an impact, which was worsened by the negative publicity on social media.

The company’s new line accentuated all the wrong body parts for some people, threatening to ruin the brand image.

To make matters worse, the company’s Chief Product Officer Sun Choe resigned. The company was already dealing with multiple headwinds and this one worsened the matters.

Having said that, Lululemon has a strong management that knows how to deal with situations like these. As far as the stock is concerned, it has already priced in the poor decisions of the management.

As the management works on the company’s recovery through an improved product launch framework, there can only be positive triggers.

Lululemon's strong international presence

Lululemon also enjoys a strong international presence thanks to its brand ambassadors in local communities across the world.

Its competitors in North America don’t have the resources for an international presence. Even in China, its competitors haven’t been able to penetrate the market. 

This gives the company a decent share of the international market.

Considering its niche status, there doesn’t seem to be any competitor in the international market that could seriously threaten the company’s market share, giving it a safe space to grow its international business.

In short, a lot of the negative events surrounding the company have not only materialized but are also priced in.

The company’s stock can skyrocket on the smallest of triggers, one of which could be the rate cuts in a few weeks from now.