How Lululemon Gained Significant Market Share Last Quarter

This article originally appears on The Motley Fool, written by John Ballard

Despite missing analysts' consensus revenue and earnings estimates for the fiscal first quarter, Lululemon Athletica (NASDAQ:LULU) stock is still sitting near an all-time high at $303 at the time of this writing. That's even with the shares fetching a high price-to-earnings ratio of 68.

The growth in Lululemon's direct-to-consumer (DTC) business last quarter likely explains why. Digital revenue accelerated to 70% on a constant-currency basis and made up most of Lululemon's business last quarter. 

Most importantly, Lululemon gained market share in the athletic apparel industry. During the call, CEO Calvin McDonald said, "We saw one of our largest quarterly gains in market share in recent years, according to NPD data."

Here's how Lululemon pulled it off.

"Science of Feel" is working for Lululemon

Demand was broad-based across core and new products. Lululemon saw healthy demand specifically within its Swiftly and Align collections, and for new products made with Everlux fabric, such as the Wunder Train and Invigorate bottoms. 

"We continue to leverage our Science of Feel product platform to solve guests' unmet needs and fuel our future growth," Chief Product Officer Sun Choe said. "We brought new innovations into our assortment in Q1 and I'm excited with what we have on tap for the coming months and quarters." 

Overall, e-commerce comps accelerated from 41% in the busy holiday quarter to 70% in the fiscal first quarter. Looking more granularly at the data, management disclosed that e-commerce traffic increased 40% and conversion was up 25%, which means that not only were more people visiting the website and mobile app, but they were spending more, too. 

"Traffic was driven by channel shift coupled with investments in digital marketing and conversion, driven by guest response to our products and the investments we have made in our global digital platforms to improve guest experience," Senior Vice President Meghan Frank said.

International growth

One of the key reasons to consider Lululemon stock for the long haul is its international growth opportunity. International revenue has been growing much faster than revenue in North America, nearly doubling over the last three years to reach $475 million in fiscal 2019.

As Lululemon entered its early recovery phase in late March, e-commerce growth accelerated to 125% in April. "During this phase, our overall business in China accelerated further as guests began to feel more comfortable returning to the stores," McDonald said. 

As the quarter played out, management saw "a new normal" emerging with more people working out at home. Europe saw a massive 170% increase in digital comp sales, while Australia increased by 150%. 

"Our brand is clearly resonating in our international markets and we continue to believe we can quadruple this business from 2018 levels by 2023," McDonald said. Quadrupling 2018 levels would put the international business well over $1 billion in annual revenue. 

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Digital momentum expected to continue

Lululemon has reopened nearly 300 out of 489 stores as of mid June. But even as stores reopen, management expects to maintain momentum in the direct-to-consumer business.

"We have clearly seen our guests interact with us in new ways via our digital offerings," McDonald said. "We expect these behaviors and routines will continue as we move forward." He also believes home virtual workouts will continue to be a regular part of people's workout regimen. 

Taking care of its most important asset

The strength of its digital platform helped Lululemon perform much better than other top retailers. Other top apparel brands reported massive losses on the bottom line, but Lululemon's robust growth from the higher-margin digital business helped the yoga specialist squeak out a small profit of $28.6 million for the quarter.

It's remarkable that Lululemon managed to remain profitable while putting its employees and ambassadors first by providing pay protection while stores were closed. Lululemon also made no cancellations for merchandise orders from vendors, which will go a long way to building strong relationships with its suppliers. 

Looking underneath the numbers, Lululemon's stellar performance is rooted in its tight relationships with customers and most importantly, its suppliers and employees. As they say, happy employees make happy customers (and shareholders).

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John Ballard owns shares of Lululemon Athletica. The Motley Fool owns shares of and recommends Lululemon Athletica. The Motley Fool has a disclosure policy.