LULU LONG POSITIONMarket just finished Full Elliot wave 1-5 and ABC correction, bounced off of a demand zone and we are expecting for it to retrace to 50% fib zone.
Entry:300
Invalidation:276
Target: 384
Lulubuy
LULU about to breakoutI predict a bullish price action of LULU based on the following 3 indicators:
- A backtest of the triangle wedge followed by a clean bounce.
- A parallel rising channel which was unbroken during last week's sell-off.
- Chaikin Money Flow reversed but needs to follow through.
Lululemon (LULU): The Channel of the Yoga Apparel IndustryIf you like this analysis, please make sure to like the post, and follow for more quality content!
I would also appreciate it if you could leave a comment below with some original insight.
In this post, I will be providing an in-depth analysis on Lulu Lemon Atheletica Inc. (LULU), by going over its business model, financials, and technicals as well.
What is Lululemon Athletica Inc. (LULU)?
Lululemon is a company that provides technical athletic apparel for yoga, running, training and most other sweaty pursuits. They differ from other apparel companies in that they offer extremely high end products.
M&A (Mergers and Acquisitions) of Mirror
- Lululemon acquired the indoors fitness company Mirror for $500m.
- Mirror is a company that offers an interactive mirror, which live streams on-demand workout classes for their users at home.
- Classes cost $39 per month
- Essentially, LULU will be offering a very similar subscription service business model to that of Peloton (PTON)
Business Models
Athleisure Products
- LULU’s main business model is in the athleisure (athletic leisure) apparel industry
- They are called the Channel of the yoga apparel industry, not because they simply offer overprices clothing, but because they know exactly who their target audience is
- They target not only people who like to wear yoga pants for workouts, but also people who want to look good in these clothes.
- Their main target, however, are people who pursue ‘mindfulness’ through activities
- There’s definitely a show-off aspect to the apparel as well, as people wear it with pride even on normal occasions.
- While trends change, it appears that the athleisure look won’t be fading away anytime soon.
- The athleisure market for men is growing as well, as the entire market grows 8% every year, with the potential to reach $517.5 billion according to Grand View Research
Direct to Consumer
- Another fact noting is that they operate in D2C (Direct to Consumer)
- They own the sales channels for online and offline consumers
- During this pandemic, they have reinforce their offline sales channels by offering online yoga classes, and introducing SNS-linked shopping features.
- As a result, while offline stores’ revenues have decreased by 48% during the pandemic, online D2C sales have increased by 67%, and their online sales have exceeded their offline sales
Subscription Service
- LULU offers a new subscription service through Mirror
- The mirror is a screen that plays fitness instructional videos
- It’s anticipated that the revenue generated from Mirror will be around $100 million this year
- According to the Bank of America, LULU will be able to raise $700 million in revenue and a subscriber base of 600,000 by 2023.
- There’s a lot of synergy to be expected through LULU Lemon’s acquisition of Mirror, as the demographics of people who purchase $400 yoga pants and $1500 worth mirrors match – high income demographics interested in exercise
Financials
- LULU has shown a 17% yoy revenue increase from their North American regions
- Their 2020 Q1 earnings were extremely disappointing as their shops have been directly targeted by the Corona Virus (COVID-19), but a revenue turnaround is anticipated for Q4
- For 2021, we can anticipate LULU’s revenue to hit $4 billion, with their Earnings per Share (EPS) at $4.23
- LULU shows astonishing EPS growth, as it has essentially doubled since 2018.
- Not having a middleman for their distribution channel significantly increases their operating profits as well, with their current percentage at 22% - much higher than its counterparts such as Adidas (ADS) or Nike (NKE)
- 88% of their revenue is generated from North American countries: Canada and the United States
- The company’s market capitalization is valued at 57 times its net profit, based on the 12 month Forward P/E ratio
- This is strong evidence for the argument that the company is overvalued.
Opportunities
-Given that we could anticipate a 28% yoy growth in the Chinese Pilates Market, LULU’s not having expanded to Asian and European markets yet suggests great opportunities for growth
- Since 2012, the Chinese population interested in Pilates has doubled to 12.5 million by 2019, and the Pilates apparel market has quadrupled to 9.7 Billion Chinese Yuan.
- The founder of LULU invested $100million in Anta – the Chinese Nike- acquiring 0.6% of the company’s share, in regards to their potential penetration of the Chinese market
- Anta does offer some Pilates related clothing, but does not have a Pilates apparel brand.
Competition
-LULU’s demographics also match with that of Peloton (PTON), and as such, we could anticipate fierce competition between the two firms
-They are also in a fierce competition with Athleta, a company that designs performance clothes for active women. Athelta is owned by GAP (GPS)
Technical Analysis
- We can take a look at LULU's daily chart for technical insight
- LULU has bounced on the $288 historic support, currently ranging between the 0.236 and 0.382 Fibonacci retracement levels
- Should we see further downfall, we could expect a bounce at the $265 historic support
- The 20 Simple Moving Average (SMA) is about to form a death cross with the 60 SMA, which has been acting as a strong indicator for uptrends and downtrends
- The Relative Strength Index (RSI) demonstrates the stock having been oversold recently
- The Moving Average Convergence Divergence (MACD) shows decreasing bearish histograms, and a potential for a golden cross
- We have seen these indicators point towards the same direction when the company was hit by the Corona Virus Pandemic, before moving on to triple in price
- While the overall trend still remains bullish, we would need further bullish confirmations to gain confidence on the uptrend
- Such confirmations would include a breakout leading prices to trade above the 60 SMA, or a close above the 0.236 Fibonacci resistance
Conclusion
Lululemon Athletica Inc. (LULU) is an apparel company that moves like a tech stock. It has extremely high potential, as it implements business diversification through its acquisition of Mirror, and is yet to expand to highly lucrative markets with huge potential such as the Asian and European markets.
As I have previously mentioned, ironically, it’ll be the luxury brands/companies that survive through hard times like these. Economic crises is when polarization deteriorates, and spending on luxurious goods increases. LULU does a great job of communicating with its customers and bringing more people in, and as such, their fundamental business model of a luxury brand remains solid.
Looking Long For LULULULU has been a MONSTER this year! With Squeezes setting up on both a daily and four-hour chart makes me think it will be headed higher towards earnings which looks to be at the end of August. Depending on how it opens tomorrow (looking for a pullback) will ultimately decide how I play it. I'd like to sell an at the money put credit spread, but with the way it's been moving, I'm also looking at the ITM August Call options.
With one of their biggest competitors (Alo Yoga) being under intense scrutiny all year, it appears they have been the benefactor from their misfortune. That aside, the chart looks very bullish and I'll be looking to play it long with options.
