Lululemon’s robust progress has made it the second Most worthy sportswear model globally, pushed by worldwide demand, and a loyal buyer base.
Regardless of latest positive factors, Lululemon’s valuation stays comparatively low in comparison with friends, suggesting potential upside if progress continues.
Nevertheless, dangers from competitors, shifting shopper tendencies, and financial uncertainties might influence its progress trajectory.
After rising by over 10% since its final earnings report, Lululemon overtook Adidas to grow to be the world’s second Most worthy 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 tendencies and world financial uncertainty, Lululemon continues to face out.
This athleisure designer is maintaining 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 business tendencies.
However after its newest rally, buyers should ask: Is that this yoga-based model priced for perfection, or is there nonetheless room to develop?
What does Lululemon do?
Lululemon Athletica reworked from a distinct segment yoga-wear model into a world 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 strategy to advertising and marketing – creating a way of group and belonging made Luluemon not only a model, however a way of life. 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 ascertain itself in males’s working, coaching, and yoga, whereas increasing into new classes resembling 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 achieved on-line and Lululemon has over 24 million membership customers, reinforcing its group strategy.
Thirdly, the corporate plans to quadruple world income from 2021. It has vital 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 style. Beneath the present CEO, the corporate has been increasing, but it surely got here at a value. Luluemon has misplaced a few of its luster with an absence 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, significantly within the troublesome ladies’s section.
We have now to say the U.S., the place comparable gross sales have been down -3% for the primary time final quarter. Weakening shoppers have dragged on many companies, and it was time for Lululemon to really feel the sting.
This scary development 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 this can be a long-term restoration trajectory or a seasonal blip, however administration was constructive about US progress on the earnings name. Enhancing 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. Web 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% increased 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 development. China gross sales surged by roughly 25% this quarter, outpacing progress in virtually each different geography. So what’s the key?
Lululemon’s model message of wellness, high quality, and premium craftsmanship resonates with Chinese language shoppers who worth authenticity and life-style over cut price pricing.
Moreover, the corporate has localized its strategy, partnering with native health influencers, internet hosting group 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 satisfy shoppers the place they store. This strategy 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 turned its enemy, and the inventory collapsed over 50% from its highs as buyers feared that Lululemon’s progress was achieved 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.
Trying on the valuation of its friends, we are able to see that regardless of robust efficiency, Luluemon’s inventory continues to be buying and selling on the low finish of the group. This would possibly replicate much less urge for food from buyers, but additionally create a chance for the corporate to to develop if it proves itself to the market.
(koyfin.com)
Let’s take a look at three doable situations 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 because of a stronger shopper. On this situation, long-term shareholders would possibly reap vital rewards.
Impartial Case: Progress moderates to round 10% per yr as markets like North America strategy 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 factors.
Bear Case: Weak spot in China catches as much as Lululemon, whereas slower world financial restoration would possibly inhibit enlargement. American shoppers keep weaker as a consequence of increased charges for longer. Margins would possibly face strain from competitors and better enter prices. The valuation would possibly compress and depart buyers with a stagnating or slowly declining inventory.
For buyers, it’s necessary to gauge how world macroeconomic circumstances evolve and the way they may have an effect on the expansion trajectory towards 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 might chip away at market share resembling Alo Yoga or Vuori.
Client preferences in style and health can shift quickly, and Lululemon’s premium pricing would possibly depart it susceptible if financial circumstances tighten and consumers start to commerce down. There’s already a rising development of dishevelled outsized clothes as in comparison with the smooth, determine enhancing type of Lululemon’s merchandise.
Provide chain disruptions, rising materials prices, or sudden geopolitical tensions might additionally dampen progress, particularly due to the danger 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 business. It’s questionable whether or not the corporate is mostly a diamond within the tough, or if shopper weak spot simply hasn’t caught as much as this model but. Buyers have to resolve whether or not they’re comfy paying prime greenback for progress that will depend on persevering with stabilization of financial circumstances.
For long-term buyers who imagine within the premium model, the inventory could also be a purchase. However should you desire conservative bets, ready for a greater entry level is likely to be your finest yoga pose. Ultimately, Lululemon stays a gorgeous enterprise, however within the attire business, success may be fleeting.
