Lululemon’s stock (NASDAQ: LULU) has gained nearly 37% since early February after the WHO declared the Coronavirus a global health emergency, while Skechers’ stock (NYSE: SKX) has lost around 19% of its value over the same time period. The lockdown in various parts of the world has hurt the apparel industry worldwide, with full recovery not expected over the next couple of months. Moreover, fading consumer demand, reduced discretionary spending, rising unemployment levels, and stay-at-home orders, resulting in stores remaining closed, continue to take their toll on the apparel industry. However, Lululemon is uniquely placed in the apparel industry. We believe Lululemon has the edge over Skechers, and is likely to fare better over the coming months because of its robust digital network, brand innovation, and a niche product portfolio as compared to Skechers.
Our conclusion is based on our detailed dashboard analysis, Lululemon Looks Cheap Vs. Skechers ‘ wherein we compare trends in key metrics for the two apparel companies over the years to determine their relative valuations under the current circumstances.
- Lululemon derives a bulk of its revenues from the sale of healthy-lifestyle-inspired athletic apparel products and accessories. Lululemon has achieved unparalleled growth in the apparel industry in the last few years, with the company’s revenues growing by a stellar 50% over 2017-2019. On the other hand, Skechers’ growth has been impressive but it has been roughly half of Lululemon’s, with the company’s revenues growing by 25% over 2017-2019.
- Lululemon has a loyal customer base and a unique product portfolio offering a variety of yoga-inspired lifestyle products while Skechers is primarily a footwear brand and faces stiff competition from the likes of Nike and Under Armour. On the other hand, Lululemon enjoys a relatively dominant position in the yoga product market and seems to be better poised for growth.
- Finally, Lululemon has a robust digital network. Lululemon’s direct to consumer revenues increased by 155 percent in Q2 2020 (ending July), despite the pandemic, led by increased traffic and better conversion rates while Skechers’ direct to consumer revenues declined by 47% in its Q2 2020 (ending June) earnings – indicating the strength of Lululemon’s direct to consumer channel.
Why Has Lululemon Stock Outperformed Over Recent Weeks?
Lululemon’s P/E based on 2019 earnings has increased from 47x to around 67x in 2020, while Skechers’ multiple has contracted from 19x to about 13x. The steeper decline in Skechers’ multiple can be attributed to the difference in their digital network and product portfolio as highlighted above.
Although Skechers’ multiple has declined, it still seems to be elevated considering that the company’s revenues and margins are at a greater risk compared to Lululemon’s. While Lululemon’s multiple is trading at an all-time high, it seems to be appropriately priced while Skechers’ P/E is higher than the level seen at the end of 2018, around 12x – indicating that the market hasn’t quite priced in the negative impact of weaker revenues and margins on the company’s stock. This leads us to believe that Skechers’ stock could be vulnerable. Overall, despite Skechers seeming to have a lower valuation, we prefer Lululemon due to the reasons stated above.
But How Long Will Lululemon Continue To Outperform?
- The expected timeline for recovery in global economic conditions, and in Skecher’s stock, hinges on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia.
- Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of Skecher’s multinational peers, including Under Armour and Crocs. The complete set of coronavirus impact and timing analyses is available here.
- We believe there will be a recovery in demand for most sectors by early October-November, with the gradual lifting of lockdowns and a gradual rise in the number of Covid-19 cases remaining within the manageable capacity of hospitals and care providers.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.