Lululemon: Is the Brand's Power Really Fading?
Lululemon: Is the Brand's Power Really Fading?
On March 21st, 2024, lululemon athletica Inc. (“lululemon”, "LULU", "Company") released its fiscal year ("FY") 2023 and Q4 FY23 results. While the Company met expectations, comments from CEO Calvin McDonald, such as "we're navigating what has been a slower start to the year in this market", along with revenue estimates of $10.7 billion to $10.8 billion for FY24—below analysts' forecasts of $11 billion—were significant factors in the subsequent sell-off. Additionally, downward revisions by analysts, including Jefferies' price slash to $240, further contributed to the decline in share price, dropping from approximately $480 per share before the earnings announcement to around $360 today.
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Jefferies analysts, among others, cited that LULU’s ballooning metrics (referring to its profitability) ‘could hit a wall and inflect negatively’, that LULU is ‘losing incremental share to Alo/Vuori’, ‘fashion in bottoms is shifting to wide-leg (not a core for LULU)’ and that ‘entrance into Mirror and footwear are mistakes in strategic direction’.
While these comments warrant consideration, Jefferies tends to ‘hate’ LULU (2022 downgrade: 7 reasons why Lululemon's stock is a sell: Jefferies) and we believe the market reaction was excessive. It’s also worth noting that, as of April 5th, 2024, the overall analysts' price target for lululemon stands at $474.4, indicating a potential upside of approximately 33%. LULU's chair also appears to share the sentiment that the price movement was excessive, as she recently purchased shares worth $1.2M at an average price of $389.
Before we delve into analyzing LULU's results and updating our thesis and valuation, we'd like to share our favorite chart of the week. Being featured on Substack last week was an honor and helped us surpass 7,000 supporters. As a token of appreciation, we're pleased to offer a 15% discount on annual plans for your first year subscription to StockOpine’s Newsletter.
Contents:
Performance Update
Industry and Branding
Valuation
Conclusion
1. Performance Update
If you're looking to gain a comprehensive understanding of the Company, we suggest reading the article we published back in January 2023 (lululemon Athletica Inc. - It’s all about branding), along with our Investment Thesis from that time. These resources were released before we activated paid subscriptions, so you can access them without any disruptions.
a. Overall
Since our latest article, the Company kept beating estimates and continued executing its Power of Three x2 plan, focusing on doubling direct-to-consumer ("DTC") sales, doubling men's sales, and quadrupling international sales. The achievement rates for these targets stand at 78%, 73%, and 52%, respectively, with three years remaining to complete the plan. These targets translate to desired compound annual growth rates (“CAGR”) of 8.7% for DTC, 10.8% for men's, and 24.1% for international sales. While these growth rates (except for international) align with industry expectations, we believe they are achievable given lululemon's ability to gain market share. Regarding international sales, with China's unaided brand awareness at 14% and significant growth potential in EMEA, achieving these expectations seems feasible.
On the ‘negative’ side, the Company fully impaired its lululemon Studio (formerly MIRROR) goodwill and provided for its obsolete related inventory. Although this impacted margins over the last couple of years, it was never part of our thesis, and we anticipated the possibility of impairment. Knowing that the Company no longer allocates resources to this segment, as it has ceased hardware sales and the content is now provided by Peloton, is desirable.
Without further ado, let's analyze the most recent numbers to understand why lululemon’s competitive position is intact, or rather strengthening, and why the growth potential exists.