Holly Black: Welcome to Morningstar. I'm Holly Black. With me is David Swartz. He is an equity analyst at Morningstar in Chicago. Hello.
David Swartz: Hello.
Black: So, David, one of the consumer stocks you cover is Lululemon. Do you want to tell us a bit about this company and why it's been so popular?
Swartz: Yes. Lululemon is an activewear manufacturer and retailer. It started out in Canada in Vancouver and expanded to North America and to countries throughout Asia and Europe. Lululemon makes activewear. It's best known for its leggings, which are primarily used originally by people practicing yoga, but it has expanded in everyday sportswear and activewear. In recent years, it's been a very popular brand and has become one of the leading brand in the athleisure fashion trend which has taken over a lot of North America and other parts of the world.
Black: And in lockdown with home working, I should imagine athleisure has become even more popular. How has this sector performed in the pandemic?
Swartz: Yes. Last year, originally Lululemon, like a lot of other activewear retailers, was hit hard by the pandemic when stores were first required to close. But then when stores reopened in the summer, there was a big explosion in activewear sales, as a lot of people were working at home and not going to gyms and starting to dress more casually. And so, they started stocking up on athleisure fashion, and Lululemon as one of the best-known activewear brands in North America really benefited from that boom and its sales in the last three quarters of last year really exploded.
Black: But how does Lululemon compare to other activewear companies? Are there any other stocks worth looking at in this space?
Swartz: Lululemon is probably one of the best-known activewear companies, but it certainly isn't the only one. Lululemon, as I mentioned, is best known for its leggings, but there's a lot of companies now making leggings. There are more styles of leggings now in the United States than there are styles of blue jeans. So, it has really exploded over the years, and there's many other companies making leggings, including very large athletic apparel companies like Nike and Adidas and Under Armour. There's smaller ones like American Apparel, and there's many private label brands, including from Amazon and many others. Many retailers have launched their own leggings and activewear lines to try to emulate Lululemon's success over the last few years.
Black: Obviously, as an analyst, you're looking at more than just fashion trends. You've got a 1-Star rating on Lululemon, which means you think it's overvalued. Why is that?
Swartz: Lululemon has often been a very high-priced stock. Going back to its IPO more than 10 years ago, it has often been kind of a cult stock because it is – given a lot of credit for building the athleisure fashion trend, investors have been attracted to it for a lot of years. It's always been a very hot stock and consequently very expensive. And right now, it's as expensive as it's ever been. And so, that's why we have it rated as 1-Star. We've rarely had it rated as undervalued in several years. So, it's been quite expensive for some years and trading often at P/Es, forward P/Es above 50 times. And so, it's very hard for us to recommend it on its valuation. So, it's not that we think that it's a bad company in anyway. We rate it as a narrow moat company, but we just don't like the valuation.
Right now, many other consumer cyclical companies, especially in apparel, are quite expensive as well. So, it's very hard to find cheap brands, cheap stocks to own in this area. One that is a possibility is Hanesbrands, which we rate as narrow moat. Hanes owns the Champion brand, which is an activewear brand, which competes a little bit with Lululemon. It's also benefited from the athleisure fashion trend. Champion is popular in Asia, North America and Europe, and Hanesbrands is one of the few stocks right now that we actually rate as 4-Stars in this area.
Black: David, thank you so much for your time. For Morningstar, I'm Holly Black.
