Better Buy: Lululemon vs. Target

lululemon (LULU 2.38%) and Target (TGT -1.31%) have both survived the retail apocalypse that has devastated many retailers over the past decade.

Lululemon has leveraged its pioneering edge in premium yoga apparel to become a dominant force in the athleisure market. It also bolstered its direct-to-consumer channels and locked in shoppers with free yoga classes and community events.

Target renovated its stores, launched more private labels, expanded its e-commerce ecosystem and used its physical stores to fulfill online orders. He matched Amazon and walmartlaunched comparable same-day delivery services and invested in better employee training.

Image source: Getty Images.

These strengths have helped Lululemon and Target weather the COVID-19 crisis this year. Shares of Lululemon have risen 60% this year even as its sales temporarily declined. Target’s stock rose about 30% as the pandemic drove more shoppers to its physical and online stores.

Lululemon has clearly generated higher returns for investors than Target, but will this trend continue next year after the the pandemic passes? Let’s take a fresh look at the two retailers to find out.

How fast is Lululemon growing?

Lululemon’s revenue grew 24% in 2018, while its comparable sales grew 18%. In 2019, his earnings increased another 21%, while his compositions increased by 17%.

A group of women attend a yoga class.

Image source: Getty Images.

Its direct-to-consumer sales, which mostly go through its online and physical stores, increased by 45% in 2018 and 35% in 2019. Its total number of stores also increased from 440 in 2018 to 491 in 2019.

Its gross and operating margins have increased over the past two years, and its net profit increased by 87% in 2018 and 33% in 2019.

Lululemon attributed the robust growth to its “Power of Three” plan, which aims to deliver double-digit annual revenue growth through the end of 2023 by double the income of his men, double its digital revenues, and quadruple its international income.

But in the first half of 2020, Lululemon’s revenue fell 6% year-over-year as the pandemic shuttered its physical stores. However, its direct-to-consumer sales still jumped 68% year-over-year in the first quarter and 155% in the second quarter as those shoppers moved online.

Unfortunately, COVID-19-related costs and increased online order fulfillment expenses squeezed its margins and its net income fell 48%. However, Lululemon continued to open new stores throughout the crisis and ended the first half with 506 locations.

These new store openings, as well as its reaffirmed commitment to its Power of Three plan last quarter, indicate that Lululemon’s growth will accelerate after the pandemic passes. Analysts expect Lululemon’s revenue to rise 4% this year as its profits fall 15%. But next year, they expect its revenue and profit to increase by 27% and 53% respectively.

How fast is Target growing?

Target’s revenue grew 4% in 2018, while its competitors grew 5%. Its turnover increased by another 4% in 2019 while its composition increased by 3%.

A target store.

Image source: target.

This steady growth was supported by its strong digital compositions, which jumped 36% in 2018 and 29% in 2019. Target’s total number of stores also increased from 1,844 in 2018 to 1,868 in 2019, which expanded the reach of its distribution network.

Its gross and operating margins also increased over the two years, thanks to a better product mix and the use of its stores to fulfill online orders. About 75% of the US population already lives within ten miles of a Target store, which makes for quick in-store pickups and deliveries. As a result, its net income from continuing operations increased by 1% in 2018 and 12% in 2019.

In the first three quarters of 2020, Target’s revenue jumped 19% year-over-year as the pandemic drew shoppers to its stores. Its digital comps jumped 141% in Q1, 195% in Q2, and 155% in Q3, indicating it has plenty of resilience against Amazon.

Target’s gross margin declined as it sold more low-margin products, but its operating margin increased as it cut marketing expenses. The expansion pushed its net income from continuing operations up 23% year over year in the first nine months.

Analysts expect Target’s revenue and profit to rise 18% and 42%, respectively, this year. But next year, they expect its revenue and profit to decline by 3% and 7%, respectively, as the pandemic passes and it faces tougher year-on-year comparisons. the other.

The evaluations and the verdict

Lululemon’s stock isn’t cheap at nearly 60 times forward earnings, but its resilience throughout the crisis and optimistic long-term expectations arguably justify that premium.

Target shares look cheaper at 21 times forward earnings, and that’s a Dividend Aristocrat which yields a forward yield of 1.6%. However, its growth will be probable deceleration next year as Lululemon’s growth accelerates again.

I like both stocks, but Lululemon is a more compelling buy than Target right now. It dominates its high-growth niche, it primarily serves affluent buyers who aren’t as exposed to the economic impact of the pandemic, and its stock doesn’t look expensive relative to its long-term growth. Target remains a solid long-term investment, but it will likely underperform Lululemon next year.