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Stock Analyst Update

An Upgrade for Lululemon

We've awarded Lululemon a narrow economic moat, as the firm has created a niche that the biggest global athleticwear companies, due to their ubiquity, cannot match.

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After continually producing excess returns and demonstrating pricing power relative to competitors during its decade as a public company,  Lululemon (LULU) now has a sufficient record to convince us that it deserves a narrow economic moat rating based on its brand intangible asset.

Despite this, we are maintaining our fair value estimate on the expectation that sales growth will slow a bit more than we previously forecast (averaging 7% annually over the next decade versus 9% previously), as the athleisure and high-end workout apparel categories become more mature and store growth slows.

While we believe Lululemon has benefited in recent years from the athleisure trend, which has increased demand for its products as casualwear, we don’t think the company’s viability depends on it. Most of Lululemon’s merchandise is designed for working out, and we believe the company has differentiated itself in that category and developed a reputation for high-quality, comfortable, and flattering apparel that now brings with it a connotation of affluence for consumers.

In our view, Lululemon has created a niche that the biggest global athleticwear companies, due to their ubiquity, cannot match. Nike, Under Armour, and Adidas can hire the best designers, place the same emphasis on innovation, and create products with the same level of quality, but they will continue to sell a majority of their products at significantly lower price points, catering to the masses and removing any sense of exclusivity from their brands. While each can copy Lululemon’s strategy of offering free classes and gatherings at stores, we do not see a sense of community or status arising from wearing those mass-market brands.

We expect the big competitors to be formidable in Lululemon’s categories, but we think Lululemon will maintain its piece of--and association with--the high end, especially as it continues to innovate and evolve to the most cutting-edge fits and fabrics.

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Bridget Weishaar does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.