Lululemon Set For 'Long-Term Profitable Growth,' Says Bullish Analyst

Following a strong third-quarter earnings report, Lululemon Athletica inc. LULU is approaching an inflection point that could lead to $4 billion in annual revenue, according to a Susquehanna analyst.

The Expert

Susquehanna analyst Sam Poser maintains a Positive on Lululemon with an $85 price target.

The Thesis

Following a meeting with Lululemon’s senior management team, Poser said he came away confident that the company is on the verge of realizing the potential the yogawear maker seemed capable of achieving at the end of 2012. (See Poser's track record here.)

“LULU is realizing its potential by living at the high end of the active lifestyle apparel space through offering great product with great consumer engagement,” the analyst said.

Lululemon CEO Laurent Potdevin told Susquehanna that his cmopany is "playing in a different sandbox" than competitors Fabletics and Athleta and prospective athleticwear retailers like Amazon.com, Inc. AMZN.

One of Poser's biggest takeaways from the meeting was that Lululemon's brick-and-mortar same-store sales and e-commerce sales are correlated.

Total comps in the third quarter reached 8 percent for Lululemon, led by 26-percent growth in men’s pants and 24-percent growth in women’s pants, according to Susquehanna.

“The endless aisle is creating much demand in the stores, but resulting sales are realized as e-commerce revenue. Hence, the connectivity in the stores is driving total company comps,” Poser said.

Lululemon has long been recognized as a brand with one of the highest levels of customer satisfaction and engagement. The company spends virtually no money on advertising.

The brand continues to innovate within the industry, taking a scientific approach to brick-and-mortar retail and hiring neuroscientists "to better understand its customers and opportunities for the company," Poser said.

Beyond a strengthening men’s business, the biggest driver for Lululemon moving forward remains international sales, particularly in China, according to Susquehanna.

The company is expecting growth in China to be driven by digital and aided by around 40 stores located in key cities, Poser said. In 2018, Lululemon is subtly altering its top 10 styles to better appeal to the Asian market, he said.

The company’s $4 billion revenue target by 2020 appears realistic, the analyst said, and he projects that revenues will exceed that target in subsequent years.

“LULU's messaging, and product and execution that reflects that messaging, is what lifts LULU above many other companies that make and market lifestyle active wear. Such touchy-feely stuff, combined with improving product and execution, continues to create customer loyalty and will bring long-term profitable growth,” the analyst said.