Lululemon’s robust progress has made it the second most useful sportswear model globally, pushed by worldwide demand, and a loyal buyer base.
Regardless of latest positive aspects, Lululemon’s valuation stays comparatively low in comparison with friends, suggesting potential upside if progress continues.
Nevertheless, dangers from competitors, shifting shopper developments, and financial uncertainties might impression its progress trajectory.
After rising by over 10% since its final earnings report, Lululemon overtook Adidas to develop into the world’s second most useful sportswear producer. What many wrote off as a inventory previous its prime is wanting extra like a diamond within the tough. Whereas most retailers battle with weak shopper developments and world financial uncertainty, Lululemon continues to face out.
This athleisure designer is holding its top-line progress going, propelled by new designs, retailer expansions, and surprisingly robust demand in China. Couple that with a loyal, higher-income shopper base, and you’ve got the recipe to defy trade developments.
However after its newest rally, traders should ask: Is that this yoga-based model priced for perfection, or is there nonetheless room to develop?
What does Lululemon do?
Lululemon Athletica remodeled from a distinct segment yoga-wear model into a worldwide athleisure participant, providing a variety of merchandise—from technical athletic clothes and footwear to health equipment—for each women and men.
Lululemon embraced e-commerce and made on-line gross sales a key a part of its technique and enabled the model to increase its footprint. Its distinctive method to advertising – creating a way of neighborhood and belonging made Luluemon not only a model, however a life-style. This has been a profitable playbook for a lot of manufacturers.
How is administration dealing with progress?
Lululemon is executing its Energy of three×2 plan, which laid out targets in 2021 to double three KPI’s by 2026.
(lululemon.com)
Firstly, Lululemon plans to double males’s income by 2026. It’s utilizing its confirmed mannequin of technologically superior premium materials to determine itself in males’s working, coaching, and yoga, whereas increasing into new classes equivalent to tennis, golf and mountaineering and tapping into footwear and equipment.
Secondly, the model doubled down on e-commerce and intends to double on-line revenues by 2026. They’ve a strong basis already. Over 39% of gross sales are completed on-line and Lululemon has over 24 million membership customers, reinforcing its neighborhood method.
Thirdly, the corporate plans to quadruple world income from 2021. It has important alternatives to increase globally, having lately entered China and began enlargement into EMEA and APAC. Out of its 749 shops, 138 are in China, 47 in Emea and 105 in APAC, establishing a foothold in these markets and creating additional alternatives for Lululemon.
The place Lululemon is missing
Expert administration is the important thing to success on the earth of vogue. Underneath the present CEO, the corporate has been increasing, however it got here at a price. Luluemon has misplaced a few of its luster with a scarcity of innovation, or what the corporate calls “newness”. It recognized and began engaged on the difficulty, managing to barely revive progress within the final quarter, notably within the troublesome girls’s phase.
We’ve got to say the U.S., the place comparable gross sales had been down -3% for the primary time final quarter. Weakening customers have dragged on many companies, and it was time for Lululemon to really feel the sting.
This scary pattern has considerably reversed course as income progress elevated to 2% YoY and comparable gross sales declined -2% as in comparison with -3% final quarter. It stays to be seen if it is a long-term restoration trajectory or a seasonal blip, however administration was constructive about US progress on the earnings name. Bettering macroeconomic circumstances might present a lift to gross sales in 2025.
Quarterly beat spurred investor optimism
The December 2024 quarterly report confirmed an organization nonetheless in progress mode. Internet income for Q3 FY2024 reached $2.4 billion, representing a 9% year-over-year enhance. This top-line enlargement was fueled by a mixture of retailer openings, bettering e-commerce penetration, and profitable product launches within the males’s and footwear classes. Comparable gross sales rose 3%, with gross margins of 58.5%.
Earnings per share (EPS) got here in at $2.87, a notable enchancment from $2.53 in the identical interval final yr. The corporate additionally raised its full-year income steerage from a spread of $9.5 billion to $9.7 billion, reflecting administration’s confidence in sustaining this momentum.
China: Why Lululemon is excelling the place others battle
Gross sales in China surged by 40% within the first two quarters – with costs 20% larger than within the U.S. It is a putting demonstration of Lululemon’s pricing energy.
Whereas many Western retailers are going through points in China amid altering shopper preferences and fierce native competitors, Lululemon is bucking the pattern. China gross sales surged by roughly 25% this quarter, outpacing progress in nearly each different geography. So what’s the key?
Lululemon’s model message of wellness, high quality, and premium craftsmanship resonates with Chinese language customers who worth authenticity and way of life over discount pricing.
Moreover, the corporate has localized its method, partnering with native health influencers, internet hosting neighborhood yoga occasions, and providing merchandise tailor-made to the preferences and local weather of Chinese language cities. Mixed with Lululemon’s digital technique—leveraging Chinese language social media platforms and integrating with native e-commerce giants—allows it to fulfill customers the place they store. This method has allowed the corporate to maintain its Chinese language operations rising.
Is Lululemon undervalued?
(koyfin.com)
Because of revenues rising 21% p.a. over the previous 10 years, Lululemon’s inventory was given a premium valuation. After progress collapsed in 2023, the valuation grew to become its enemy, and the inventory collapsed over 50% from its highs as traders feared that Lululemon’s progress was completed for good. However with each income and earnings progress outpacing estimates and rising in Q3, investor sentiment has improved. Proper now, the corporate’s P/E ratio stands at 27.43, which signifies about 20% upside from right here to the historic median.
Wanting on the valuation of its friends, we will see that regardless of robust efficiency, Luluemon’s inventory remains to be buying and selling on the low finish of the group. This may replicate much less urge for food from traders, but in addition create a possibility for the corporate to to develop if it proves itself to the market.
(koyfin.com)
Let’s take a look at three attainable eventualities to see how Luluemon’s valuation stacks up:
Bull Case: Lululemon continues to develop earnings by 15%+ yearly over the subsequent 5 years, pushed by geographical enlargement and sequential progress and margin enchancment due to a stronger shopper. On this situation, long-term shareholders may reap important rewards.
Impartial Case: Progress moderates to round 10% per yr as markets like North America method saturation and China’s progress normalizes. If margins keep robust, the valuation might compress to replicate slowing progress. Whereas the aggressive evaluation means that Lululemon’s inventory might continue to grow, I might not count on explosive positive aspects.
Bear Case: Weak point in China catches as much as Lululemon, whereas slower world financial restoration may inhibit enlargement. American customers keep weaker as a consequence of larger charges for longer. Margins may face stress from competitors and better enter prices. The valuation may compress and depart traders with a stagnating or slowly declining inventory.
For traders, it’s vital to gauge how world macroeconomic circumstances evolve and the way they could have an effect on the expansion trajectory in opposition to excessive multiples. Lululemon might proceed to outperform, but when progress stumbles, the inventory might face a harsh valuation reset.
What dangers is Lululemon going through?
Even the strongest manufacturers face challenges. For Lululemon, dangers embrace elevated competitors from established names like Nike, Adidas, and rising direct-to-consumer manufacturers that would chip away at market share equivalent to Alo Yoga or Vuori.
Shopper preferences in vogue and health can shift quickly, and Lululemon’s premium pricing may depart it susceptible if financial circumstances tighten and customers start to commerce down. There’s already a rising pattern of saggy outsized clothes as in comparison with the modern, determine enhancing fashion of Lululemon’s merchandise.
Provide chain disruptions, rising materials prices, or sudden geopolitical tensions might additionally dampen progress, particularly due to the chance of commerce wars with China.
Outlook for the enterprise
Lululemon stands at a juncture. The corporate’s newest quarterly outcomes present no signal of slowing down, with progress firing on a number of cylinders. However we can not ignore the truth that Lululemon is a standout within the trade. It’s questionable whether or not the corporate is known as a diamond within the tough, or if shopper weak point simply hasn’t caught as much as this model but. Buyers must determine whether or not they’re snug paying high greenback for progress that is determined by persevering with stabilization of financial circumstances.
For long-term traders who imagine within the premium model, the inventory could also be a purchase. However for those who choose conservative bets, ready for a greater entry level is likely to be your finest yoga pose. In the long run, Lululemon stays a sexy enterprise, however within the attire trade, success may be fleeting.
