What’s In Store For Lululemon This Year?

Shares of Lululemon Athletica (NASDAQ:LULU) rose a significant 6.3% on Monday after being upgraded by two analysts at Wells Fargo and Jefferies. ^[1] Wells Fargo expects the company to do a lot better this year as the company seeks to improve its supply chain, which had caused several inefficiencies in the previous few quarters. Both firms believe that the company has the potential to widen its margins this time around, and this could help drive earnings in the quarters to come. ^[2] Lululemon’s stock price had previously suffered due to tainted reputation (after the founder made inappropriate comments about a percentage of potential and existing customers) and product recalls. So, going forward, does the “athleisure” apparel company have what it takes to turn things around?

First and foremost, Lululemon is trying to make changes to its supply chain which may help it lower costs and improve inventory management. Last year, the athleisure giant was forced to markdown a large portion of its products as sales suffered. An effective supply chain can help reduce such occurrences. Furthermore, sales could increase by targeting a larger target audience — men and kids. This is relatively untapped in comparison to their business geared towards women. ^[3]

See our complete analysis for Lululemon

In terms of sales strategies, the company should try increasing international penetration, which accounts for a meager 6% of total sales at present. However, it should be noted here that the company has spent a lot in 2015 to push into international markets. Lululemon should also be wary of setting the right price point in such markets abroad, which can prove to be a make-or-break decision for their business. Apart from this, the company should also consider improving its e-commerce platform, which accounts for less than 20% of all sales. With the unprecedented boom and rising popularity of e-commerce, the company should attempt to make its online offerings better in an attempt to drive sales, going forward.

However, the biggest positive for Lululemon this year is the expiration of its standstill agreement with private equity firm Advent in February. This could definitely enable the company to pursue new growth opportunities, which were until now hampered by the agreement. The expiration of the deal will prohibit the private equity firm from buying additional stock in the company or announcing a public takeover bid. It will further prohibit the company from “initiating a merger/consolidation transaction.” According to J.P. Morgan analyst Matthew Boss, the conclusion of the agreement will enable Advent (the largest stakeholder in Lululemon with a 15.6% stake) to make moves to increase its growth potential. To substantiate his point, Boss cited Dow Chemical’s merger with DuPont which was announced a day prior to the expiration of Third Point’s standstill agreement with Dow.

Despite all the points above, there are a few big picture factors that can hurt Lululemon in the near future. The robust growth in yoga enthusiasm is nearing saturation. This spike in interest for yoga has definitely helped the company over the years, bringing it almost $2 billion in revenues annually. The maturation of the yoga trend could potentially hurt the company’s top-line prospects moving forward, as Lululemon is primarily yoga-focused. Another problem the company could face is increased competition from established companies like Nike, Reebok and Under Armor, who are trying to increase penetration into the “athleisure” market. These companies are well-established and have a lot more marketing resources, which could allow them to spend heavily on advertising to build their brands. ^[4]

Given the factors mentioned above, it seems silly to try and speculate on the future of the athleisure giant. Will Lululemon push through and silence its critics? Only time will tell.

1. Lululemon: Not One but Two Upgrades Lift Stock Above Storm, www.blogs.barrons.com [↩]
2. Lululemon: A Stock to Watch For in 2016, www.realmoney.thestreet.com [↩]
3. Lululemon has Snapped Back into Shape for 2016, www.qz.com [↩]
4. 3 Reasons to Short Lululemon’s Breakout, www.seekingalpha.com [↩]