Lululemon Athletica (NASDAQ:) is one of the great stocks of 2019, up nearly 72% as it opened for trade Nov. 15.
The company earned . It has exceeded that in just three quarters this year. Investors are willing to pay up for that performance. Its trailing price-to-earnings ratio is 53. Its market capitalization of $28 billion is eight times last year’s sales.
But the lesson for investors goes beyond Lululemon. This is a story about the main retail trend of this decade, one defined in the clothing space by a Canadian company that’s .
Fully Branded, Fully Controlled
The secret of Lululemon’s success is that it gets its merchandise made on order, sells only through its own stores and website, and almost never offers sales. People really do pay $110-$120 for a pair of its pants. They’re not getting them for $40-$60 at outlet prices.
Lululemon’s costs are its manufacturing costs, its revenues are its full retail price. There are no wholesalers or stockjobbers in the way. While other retailers are getting 10%-20% margins, Lululemon’s gross profits are more than 50% of sales.
The retailer has done this consistently through the decade. During that time, it has suffered two CEO scandals. The first took out founder the second his successor Laurent Potdevin.
At the time Potdevin left, Lululemon was said to have a “toxic ‘boy’s club’” culture. But under Calvin McDonald, who joined from Sephora last year, the company hasn’t missed a beat.
Copying the Retail Trend
The Lululemon story is important not just because of the company’s success, but because of what it says about retailing.
Take Apple (NASDAQ:). There are now over 500 Apple stores, even though the company also uses other channels to sell its products. The stores help it control pricing, quality and user experience. They have made Apple the most valuable company in the world.
Or, consider Target (NYSE:). The company has distinguished itself the last few years with store brands. Its Cat & Jack children’s line delivers $2 billion in sales alone. This means Target wins the entire mark-up, from manufacturing to retailing. Shares are up 71% in 2019.
Want a third? Well, think about Nike (NYSE:). It made news this week by dropping Amazon (NASDAQ:) from its list of outlets. But the bigger news is that one-quarter of Nike’s sales are now direct-to-consumer. This maximizes its profit on each sale. Nike is up 25% so far in 2019.
Brands that can’t make the new trend work have suffered. The value of Under Armour (NYSE:, NYSE:UAA) was cut in half after Sports Authority, its primary U.S. retail outlet, went under. , but it now has less than half of Lululemon’s market cap.
The Bottom Line on LULU Stock
Clothing brands that rely on retailers for distribution are in a double bind. Outlets that once championed them are going under. Giant retailers who might have picked up the slack have found they can create their own brands.
Meanwhile, brands that can control both production and distribution, like Lululemon, are seeing expanded margins and new opportunities. Lululemon is taking a page from the Nike playbook with in the Mall of America. It’s a clone of a store in Chicago that, at nearly 20,000 square feet, is big enough to host events and hold a coffee bar.
Retailing used to be about stores that enveloped shoppers with choices. It’s now about brands that define choices, like Lululemon. It’s the most important retailing story of the 2010’s.
is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at . As of this writing he owned shares in AMZN and AAPL.
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