- Lululemon has rapidly grown to become the second most valuable sportswear brand worldwide, fueled by international demand and a dedicated customer base.
- Although Lululemon has seen recent growth, its valuation still lags behind competitors, indicating potential for further appreciation if momentum persists.
- However, challenges from competition, changes in consumer preferences, and economic uncertainties may affect its growth path.
Since its last earnings report, Lululemon’s stock has surged by more than 10%, surpassing Adidas (OTC:) to claim the title of the second most valuable sportswear maker globally. What many considered a waning stock is now emerging as a hidden gem. Unlike many retailers grappling with sluggish consumer trends and global economic turbulence, Lululemon continues to shine.
This athleisure powerhouse is driving top-line growth through innovative designs, store expansion, and robust demand, particularly in China. Combined with a dedicated, higher-income customer base, it’s a formula that enables the brand to defy industry headwinds.
In light of this recent surge, investors are left to ponder: Is Lululemon’s valuation reflective of perfection, or is there still significant growth potential ahead?
What is Lululemon’s focus?
Lululemon Athletica (NASDAQ:) has evolved from a specialized yoga-wear brand to a leading global athleisure company, offering a diverse array of products, including high-performance athletic apparel, footwear, and fitness accessories for both men and women.
The brand has successfully harnessed e-commerce, integrating online sales as a vital component of its strategy, thereby expanding its market presence. Through a unique marketing approach that fosters a sense of community and belonging, Lululemon has transformed itself from just a brand into a lifestyle choice, a strategy that many companies have sought to emulate.
How is management driving growth?
Lululemon is currently implementing its Power of 3×2 strategy, which aims to double three key performance indicators (KPIs) by 2026.
- The company is focused on doubling its men’s revenue by 2026. It is leveraging its expertise in technologically advanced fabrics to penetrate the men’s running, training, and yoga markets, while also branching into new categories like tennis, golf, and hiking, alongside footwear and accessories.
- Lululemon is committed to enhancing its online sales, targeting a doubling of digital revenue by 2026. Currently, online sales already account for over 39% of total revenue, with more than 24 million members reinforcing its community-oriented approach.
- The brand aims to quadruple its global revenue relative to 2021, recognizing substantial growth opportunities, especially following its recent expansion into China and the regions of EMEA and APAC. Out of its 749 stores, 138 are located in China, 47 in EMEA, and 105 in APAC, providing a foothold in these burgeoning markets.
Where does Lululemon need improvement?
Effective management is essential in the fashion industry. Under the current CEO, while Lululemon has seen expansion, it has also struggled to maintain its innovative edge, which the company refers to as “newness.” They have recognized this challenge and recently managed to rekindle growth in the last quarter, particularly in the struggling women’s segment.
It’s important to highlight the situation in the United States, where comparable sales dipped by 3% last quarter, marking a challenging period as consumer sentiment wanes. This trend has shown some signs of reversal, with revenue growth reaching 2% year-over-year and comparable sales declining by 2%, an improvement from the previous quarter. Whether this signals a sustained recovery or a temporary uptick remains uncertain, but management expressed optimism during the earnings call regarding growth prospects in the U.S. as macroeconomic conditions improve.
Quarterly performance boosts investor confidence
The December 2024 quarterly report illustrated Lululemon’s continued growth. Q3 FY2024 net revenue hit $2.4 billion, marking a 9% year-over-year increase. This growth can be attributed to new store openings, increased e-commerce sales, and successful launches in men’s and footwear categories. Comparable sales rose by 3%, with gross margins reaching 58.5%.
Earnings per share (EPS) improved to $2.87, up from $2.53 during the same period last year. Furthermore, the company has raised its full-year revenue guidance, now projecting between $9.5 billion and $9.7 billion, reflecting strong management confidence in maintaining this growth trajectory.
What sets Lululemon apart in China?
Sales in China experienced a remarkable 40% increase in the first two quarters, with prices averaging 20% higher than those in the U.S. This highlights Lululemon’s strong pricing power. While many Western retailers are struggling in China due to shifting consumer preferences and fierce local competition, Lululemon is managing to thrive. In fact, sales surged approximately 25% this past quarter, outpacing growth in nearly every other region. So, what’s their secret?
Lululemon’s brand ethos of wellness, quality, and premium craftsmanship resonates deeply with Chinese consumers, who increasingly prefer authenticity and lifestyle offerings to mere bargains.
Additionally, the company has tailored its approach to the local market by collaborating with fitness influencers, organizing community yoga events, and developing products that consider the preferences and climate of various Chinese cities.
By leveraging a digital strategy that utilizes Chinese social media platforms and integrates with local e-commerce giants, Lululemon effectively reaches consumers in their preferred shopping environments, contributing to the brand’s sustained growth in China.
Is Lululemon undervalued?
Over the past decade, Lululemon’s robust revenue growth of 21% annually had positioned its stock at a premium valuation. However, following a slump in growth in 2023, the stock experienced a decline of over 50% from its peak, as many investors feared the company’s growth had come to a halt. Yet, as both revenue and earnings have outperformed expectations in Q3, investor sentiment is improving. Presently, the company’s P/E ratio stands at 27.43, suggesting a potential 20% upside to reach historical median levels.
When reviewing the valuations of its competitors, Lululemon’s stock still trades at the lower end of the spectrum, which may indicate reduced investor enthusiasm but also presents an opportunity for growth if the company proves itself to the market.
Let’s evaluate three potential scenarios regarding Lululemon’s valuation outlook:
- Bull scenario: Lululemon continues to expand earnings by 15%+ annually over the next five years, driven by geographic growth and increasing consumer engagement, resulting in substantial rewards for long-term shareholders.
- Neutral scenario: Growth moderates to about 10% per year as North American markets hit saturation and China’s growth stabilizes. If margins remain favorable, valuations could adjust to reflect this slower growth. Although Lululemon’s stock may continue to appreciate, substantial gains may be less likely.
- Bear scenario: Challenges in China begin to affect Lululemon as global economic recovery lags, with American consumers remaining cautious due to prolonged high-interest rates. Competition and rising input costs might pressure margins, leading to a decline in the stock’s valuation.
For investors, it’s crucial to monitor how global economic trends evolve and their impact on growth assumptions against high valuations. While Lululemon could continue to outperform, any setbacks could result in a significant valuation correction.
What challenges does Lululemon face?
Even the strongest brands are not immune to challenges. Lululemon faces competition from established industry giants like Nike (NYSE:) and Adidas, as well as emerging direct-to-consumer brands such as Alo Yoga and Vuori, which could erode its market share.
Consumer preferences in fashion and fitness can change swiftly, and Lululemon’s premium pricing may pose a risk if economic conditions turn sour and customers start opting for lower-priced alternatives. Additionally, there is a rising trend towards baggier styles, contrasting with Lululemon’s sleek and form-fitting designs.
Furthermore, disruptions in the supply chain, escalating material costs, or unexpected geopolitical tensions may hinder growth, especially in light of potential trade conflicts with China.
The outlook for Lululemon
Lululemon finds itself at a pivotal moment. The company’s latest quarterly results exhibit robust growth across multiple fronts. Still, it’s important to acknowledge Lululemon’s distinct position in the market; there are questions about whether it truly is an undiscovered gem or if consumer weakness is merely yet to catch up with the brand. Investors must consider whether they are comfortable investing in a high-value growth opportunity contingent on the stabilization of economic conditions.
For long-term investors who have faith in the premium brand’s potential, buying the stock could be worthwhile. However, if a more conservative approach suits you better, waiting for a more favorable entry point might be advisable. Ultimately, while Lululemon appears to be a compelling business, success in the apparel industry can be unpredictable.
