Why Lululemon Is Winning Despite the Coronavirus Crisis

Wall Street remains bullish on Lululemon Athletica Inc. despite interruptions to its business due to the novel coronavirus.

On the heels of its fourth-quarter earnings release at market close, shares for the apparel and accessories retailer improved 3.7% to $200.80. The Vancouver-based company logged earnings per share of $2.28, compared with forecasts of $2.24, on profits of $298 million for the period ended Feb. 2. Revenues surged 20% to $1.4 billion, versus expectations of $1.38 billion. Total comps also jumped 20%, driven by direct-to-consumer revenue growth of 41% and same-store sales that improved 9%.

During Lululemon’s fourth-quarter conference call, CEO Calvin McDonald said that the company was seeing “virus-related impact” on performance across its markets. It did not provide an outlook for the upcoming fiscal year, joining a roster of retailers — including Dick’s Sporting Goods and Skechers — that have either withdrawn or opted to not provide fiscal guidance in the past week.

However, analysts touted Lululemon’s ability to survive the broader economic fallout from the pandemic. In a distribution note, Susquehanna Financial Group’s Sam Poser wrote, “The 4Q19 results, 1Q20 commentary, commitment to its team and those ambassadors that support the team and plenty of liquidity are proof-points that Lululemon should weather the COVID-19 crisis better than most and emerge stronger when the crisis ends.”

On March 15, Lululemon became one of the first major nationwide retailers to shutter its stores — and continue to pay workers — across Europe and North America. Stores in New Zealand remain closed, while outposts in Australia are operating on reduced hours. In China, all of its stores, except for the location in Wuhan, are now open. The majority of its outposts in the country are back to regular operating schedules.

During the crisis, customers are still able to shop the brand’s e-commerce platform and engage with its digital platforms. The athletic company has also allocated $2 million to support its brand ambassadors, who generally work in yoga studios and gyms.

What’s more, the coronavirus has forced many companies to roll out mandatory work-from-home policies, which has generally spurred a dressing-down in the workforce: As people hunker down in their homes, experts say yoga pants, leggings, sweats and hoodies have become everyday fashion — a boon to Lululemon’s core category. Meanwhile the athleisure boom, bolstered by social movements that encourage quarantined people to stay active, continues to keep up its momentum.

“These are some of the reasons we’re confident in our abilities to navigate the near term while working to realize the opportunities over the longer term,” CEO Calvin McDonald said in the conference call. “In addition, we have early learnings from China, which show us that our business will bounce back. We are not yet back to pre-closing volumes, but the business is getting stronger week by week.”

Lululemon ended the 2019 fiscal year with $1.1 billion in cash, no long-term debt and a $400 million untapped revolver. J.P. Morgan analyst Matt Boss compared the retailer’s current state to that of rival sportswear giant Nike, which announced in its conference call on Tuesday that it was also seeing encouraging recovery signs now that its stores have reopened for business in China.

“Lululemon entered the current COVID-19 situation in a position of strength,” Boss wrote in a distribution note. “Management is applying the China ‘playbook’ to their global planning framework, running online sweat classes in North America and Europe to connect with consumers — echoing China’s WeChat marketing strategy that notably resulted in increased customer acquisition.”

For the full year, Lululemon saw revenues increase 21% to $4 billion, while earnings per share were $4.93, compared to the prior year’s $3.61. The company said it would continue to monitor its supply chain and distribution network, as well as the safety of its employees, as it manages the day-to-day business amid the health crisis.

“We have the balance sheet, the connection to our community, the strength of our category and the right growth initiatives to sustain us while we keep investing well into our future,” McDonald added. “We are planning for multiple scenarios, but in any one of these, we know that our brand is strong and has unique pillars of strength that will keep driving our momentum forward.”

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