VALUATION HIGHLIGHTS
- Americas constitute 71% of the Trefis price estimate for Lululemon Athletica's stock.
- China Mainland constitutes 12% of the Trefis price estimate for Lululemon Athletica's stock.
- Rest of World constitutes 10% of the Trefis price estimate for Lululemon Athletica's stock.
WHAT HAS CHANGED?
- Lululemon Saw Mixed Results in Q2
The company earned a profit of $3.15 per share, up from $2.68 a year ago, beating estimates by $0.23 on a 7.2% increase in revenue to $2.37B, $40 million shy of expectations. Revenue for the women's segment increased by 6%, while the men's segment saw sales jump 11%. Accessory sales rose 7% y-o-y. Breaking the numbers down by region, revenue in the Americas edged up 1% y-o-y while international sales jumped 29%. The company's comparable sales were up by just 2%, missing projections for a 4.52% increase. The athleisure company's inventory fell 14% in the quarter despite an increase in store count, showing that it is keeping inventory lean. However, it said it expects to boost inventory by a mid-teens percentage in fiscal Q3.
Note:Lululemon's FY'23 ended on January 28, 2024. Q2 FY'24 refers to the quarter that ended on July 28, 2024.
- Guidance
Lululemon’s guidance reflects a more cautious consumer landscape. The company's management forecasts fiscal third-quarter revenue to grow by 6% to 7% y-o-y to between $2.34 billion and $2.36 billion with adjusted earnings per share EPS of between $2.68 and $2.73.
For the full year, the company lowered its revenue guidance to be between $10.37 billion to $10.475 billion from an initial guidance of $10.7 billion to $10.8 billion. Earnings guidance was lowered to $13.95 to $14.15 per share from previous guidance of $14.27 to $14.47 guidance (this was raised last quarter from $14-$14.20 per share).
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Lululemon's value that present opportunities for upside or downside to the current Trefis price estimate for Lululemon:
Lululemon EBITDA Margin: Another factor critical to Lululemon's cash profits is the high margins on the company's products. The demographic targeted by the company is higher-end consumers. As a result, its products were priced at much higher levels historically than similar products manufactured by companies like Nike, Under Armour, and Adidas. But that has changed in the recent past. Furthermore, the company has faced increasing costs. This has dampened the EBITDA margin. The figure fell from 26% in 2021 to about 21% in 2022, due to higher markdowns, sales mix, and increased damages and shrink due to supply chain constraints during this period. However, this metric recovered to around 27% in 2023. By the end of our forecast period, we expect the LULU EBITDA margin to increase and stabilize around the 29% level. If the margins reach 24%, it would mean a ~15% downside to our price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for LULU at the top of the page.
BUSINESS SUMMARY
Lululemon Athletica Inc. is a manufacturer of yoga-inspired athletic wear. The company's products include performance apparel and accessories for women, men, and young girls. The apparel assortment includes items such as fitness pants, shorts, tops, and jackets, and is designed for healthy lifestyle activities and general fitness.
Lululemon's products are sold through company-owned stores and showrooms, the company website, and several strategic partners. The company also sells products with small visual or design defects through its factory outlets or specially organized warehouse sales.
Its products are manufactured in factories in Canada, the United States, Peru, China, Taiwan, South Korea, Israel, India, Bangladesh, Indonesia, Malaysia, Cambodia, Sri Lanka, Vietnam, and Switzerland.
The company operates in over 25 countries around the world and organize its operations into four regional markets: Americas, China Mainland, Asia Pacific (APAC), and Europe and the Middle East (EMEA). They report three segments, Americas, China Mainland, and Rest of World, which is comprised of the APAC and EMEA regions on a combined basis.
SOURCES OF VALUE
The company is engaged in creating yoga and fitness activity-based communities in the U.S. and Canada. The company organizes many fitness camps and has also entered into partnership agreements for the sale of its apparel with many athletic teams, yoga studios, and fitness facilities in the U.S. and Canada. Most of the company's retail sales are a result of the visibility the company gains from these interactive endeavors. Additionally, the company's wholesale program is based on identifying fitness and yoga studios, to which it partners and sells its products to.
The company also offers yoga studios and fitness club essentials like yoga mats, blocks, and straps.
KEY TRENDS
Some of the key factors driving Lululemon's stock value are unique to the company. These include:
- The "scarcity" model
Lululemon's stores are usually known for keeping a low inventory of new products and quick turnover of said inventory. This means that customers loyal to the brand are generally aware that if they like a product, they better purchase it right away because it might not be there the next time they visit the store. Additionally, the company rarely offers sales, which means that customers have to pay the full price for products at all times.
- Scope To Expand
Lululemon is competing in the global sports apparel market, estimated to grow from around $194 billion in annual revenue in 2023 to a projected $306 billion by 2030. That means the sports apparel market is projected to grow at a compound annual growth rate of 7% for the next six years. To put that into context, Lululemon's revenue was just $11 billion in 2023.
- Expensive products
Lululemon has crafted for itself a reputation as an apparel company that makes aesthetically pleasing, reliable, and functional products. While the company has been working on improving the fit and fabric of its products, it has still managed to gain for itself a strong and loyal customer base. These are some of the reasons why it manages to charge a high premium for its products.
- Generalized trend towards fitness-related activities & health-conscious lifestyle
Lululemon's products are benefiting from a generalized trend toward fitness-related activities and health-conscious lifestyles. Following the recession, the private sector has stepped up spending on healthcare. The introduction of products like Apple's iWatch, Samsung's Galaxy Gear, and apps like Nike+ and Under Armour's MapMyFitness, can be seen as complementary to fitness and training apparel. As the costs of healthcare have been outsourced from the state to the private sector, individuals are likely to find treatments much more expensive than they did in the past. The result is a much more health-conscious society, taking precautionary steps far in advance to avoid those prohibitive and potentially fatal costs. These trends are driving the growing interest of urban dwellers in training, running, and other such activities. If these trends continue, consumer spending on such products is likely to rise. In that environment, a company with a unique retailing strategy, and a loyal customer base like Lululemon, is likely to benefit.
- The company continues on its growth strategy
Lululemon unveiled a new five-year growth plan named Three x2 in April 2022. The plan aims to roughly double its annual revenue from $6.3 billion in fiscal 2021 to $12.5 billion by fiscal 2026. The retailer plans to hit that target by doubling its men's and digital revenues as well as quadrupling its international revenue - relative to fiscal 2021.
