For over a decade, Lululemon (Nasdaq: LULU) has had a stranglehold on the athleisure vogue market. Luluemon inventory hit a excessive of roughly $511/share at the start of 2024. However, since then, it has tumbled 40% – unhealthy sufficient to make one of many worst-performing shares within the S&P 500. So, that is the right time to scoop up shares of Lulu at a reduction? Or is that this the start of the top for Lulu’s dominance?
Let’s have a look.
Lulu’s Most Current Quarter
I dove into Lululemon’s most up-to-date quarterly earnings report (June sixth) to get an concept of how the corporate has been performing just lately. Right here’s what I discovered:
- Internet Income: $2.2 billion, up 10% yearly.
- Gross Revenue: $1.3 billion, up 11% yearly
- Steadiness Sheet: The corporate ended the Q1 2024 with $1.9 billion in money
- Steering: For Q2 2024, Lululemon expects web income of $2.4 – $2.42 billion, which might symbolize development of 9% to 10%
- Inventory Repurchases: The Board of Administrators approved a $1 billion inventory buyback program.
At first look, these outcomes aren’t unhealthy in any respect. However, they’re additionally not overwhelmingly good – particularly for a corporation that ought to nonetheless be rising pretty shortly.
CEO Calvin McDonald said that there was robust momentum in worldwide markets final quarter. He additionally confirmed that the corporate left cash on the desk by not having sufficient merchandise in inventory to fulfill excessive demand. McDonald additionally said that he’s assured within the firm’s skills transferring ahead.
Trying forward, the corporate is specializing in product innovation, visitor expertise, and market growth. Lululemon additionally expects development in these areas:
- Males’s Attire
- E-commerce
- Worldwide web income: Worldwide income presently makes up simply 21% of the corporate’s gross sales. Lulu hopes to quadruple 2024 int’l income relative to 2021.
Nonetheless, so far as unhealthy information, Lululemon introduced the departure of its Chief Product Officer, Solar Choe. In accordance to some reviews I learn, Choe was a driving pressure behind product innovation at Lululemon. The corporate will miss Choe and has needed to reshuffle its inside construction following this departure.
So, what does all this imply for traders?
Time to Purchase Lululemon Inventory?
With Lululemon inventory down 40% YTD, it’d seem to be time to deploy Warren Buffet’s well-known recommendation of “purchase an awesome firm at a very good worth.” However, I don’t assume this is applicable to Luluemon inventory proper now. I consider that there’s draw back potential forward for Lululemon thanks to a few threat components.
Danger #1 – Elevated Competitors
Years in the past, Lululemon was just about alone within the athleisure area. This wasn’t all too stunning, for the reason that firm basically created athleisure. Certain, you might argue that Nike (NYSE: NKE) or Adidas (OTCMKTS: ADDYY) had been semi-competitors. However, Lululemon was at all times in a vastly completely different area than these two all-in-one athletic attire giants. Lulu goes after a way more area of interest, high-end market.
Lulu’s days of monopolistic energy are shortly coming to an finish. Right now, Lululemon faces steep competitors from firms like Alo, Vuori, Health club Shark, Fabletics, and lots of smaller manufacturers. Granted, none of those firms have grown to the dimensions of Lululemon (but). However, they’re all nonetheless formidable opponents:
- Vuori: This San Diego-based model is value an estimated $4 billion and is contemplating an IPO. It has additionally differentiated itself from Lululemon by primarily focusing on males (an space that Lulu is trying to for development). For what it’s value, I (a 28-year-old male) personal garments from each manufacturers and like Vuori for a handful of causes.
- Alo: Alo is value an estimated $10 billion. It gained recognition due to its savvy influencer-first method to advertising.
- Fabletics: Fabletics thought-about an IPO in 2021 that may have valued it at $5 billion. I couldn’t discover any numbers newer than this.
- Gymshark: Gymshark is valued at slightly below $2 billion. It’s additionally primarily based in the UK which might hinder Lulu’s worldwide growth plans.
With a market cap of slightly below $40 billion, these firms nonetheless pale compared to Lululemon. However, that’s not the purpose. The purpose is that roughly 10 years in the past Lululemon was the one title in high-end athletic attire. Right now, there are many locations the place clients should buy a $128 pair of leggings or pants. Two of those opponents (Vuori and Gymshark) additionally function in verticals that Lulu is trying to for development.
Gross sales information for the 4 opponents listed above is essentially personal. So, I used one other metric to match them to Lululemon: Instagram followers (Nasdaq: META). Right here’s how they stack up:
- Gymshark: 7 million followers (Gymshark Girls has 3.5 million)
- Lululemon: 5 million
- Alo: 2 million
- Fabletics: 2 million
- Vuori: 1 million
When you’re pondering of shopping for Lululemon inventory, you must contemplate how this competitors might eat into Lululemon’s development over the following 5-10 years. Lululemon has such a head begin so it’s unlikely that it’ll get absolutely dethroned from its prime place. However, the corporate additionally received’t benefit from the monopolistic place that it had over the previous 12 months. Loads of former-Lulu male clients might begin choosing Vuori whereas abroad athletes might select Gymshark.
Danger #2 – Dupe Tradition
The rise of dupe tradition is one other situation that might damage Lululemon inventory within the coming months. A “dupe” or duplicate is only a knockoff of an current product.
The price of residing within the US has risen dramatically previously few years. In response, US customers are turning to dupes greater than ever. In Lululemon’s case, extra individuals are shopping for off-brand yoga pants for $40 as an alternative of shelling out $128 to purchase Lulus. When you seek for #Lululemondupe on TikTok, you’ll see tons of movies on the topic that routinely get tens of millions of views. I additionally took a take a look at Google Traits information, which confirmed that web searches for “lululemon dupe” have been constantly trending increased since 2020.
Lululemon isn’t the one firm that has to cope with dupes. In truth, most high-end manufacturers can anticipate their merchandise to get copied. For instance, Nike (Nasdaq: NKE) has at all times had a problem with faux Air Jordans but it surely has by no means appeared to harm the corporate’s income.
Proper now, it’s onerous to inform if dupe tradition is hurting Lululemon’s gross sales. However, it’s a large enough situation that Lululemon felt the necessity to addressed it. Both manner, dupes are one other threat issue for Lulu transferring ahead.
Danger #3 – Gen Z’s Dishevelled Pants Development
Lululemon has made a residing off of its skin-hugging yoga pants. However, from what I’ve seen, Gen Zers present a desire for baggier sweatpants, hoodies, and t-shirts.
A 5-year Google Traits chart for “dishevelled pants” helps this thesis. However, aside from that, I don’t have a lot tangible information to level to for this pattern. It’s simply one thing I’ve noticed on social media and in my very own life. In my expertise, tighter garments appear to be on their manner out whereas overly dishevelled clothes is in. I scanned Lululemon’s web site and didn’t discover something that appeared like they’ve caught on to this pattern. Lululemon additionally launched in 1995 and had a stranglehold on customers within the 2000s and 2010s. However, by this level, Lulu won’t resonate as a lot with youthful buyers. If this doesn’t change, I wouldn’t be stunned if Lululemon began to get stereotyped as an “older folks model” within the coming years and misplaced floor to “cooler” upstarts (just like the aforementioned Vuori, Alo, Gymshark, and many others). That mentioned, vogue traits fluctuate by area and may change shortly.
That is admittedly the weakest threat on this checklist. However, it’s nonetheless a possible threat nonetheless.
Now, again to the query at hand.
Ought to You Purchase Lululemon Inventory?
I wouldn’t. It looks like Lulu is dealing with fairly a number of headwinds over the approaching months. The corporate simply misplaced a key govt in Solar Choe. It’s additionally dealing with steep competitors within the precise verticals the place it’s hoping for development (males’s put on and worldwide markets). The inventory has additionally been getting punished thus far this 12 months, which is an indication that investor sentiment has modified for Lululemon – maybe the hardest impediment to beat.
I don’t essentially assume that Lululemon inventory will tank over the approaching months. However, it’s possible that Lulu will underperform the market or at finest break even. Even when Lulu hits its objective of 10% income development in 2024, I don’t see traders getting significantly excited.
That mentioned, vogue traits can change on a dime. All it takes is the blowout success of 1 product to vary the narrative – a feat that Lulu has achieved many occasions.
I hope that you simply’ve discovered this text worthwhile on the subject of discovering whether or not or to not purchase Lululemon inventory. When you’re thinking about studying extra then please subscribe beneath to get alerted of latest articles.
Disclaimer: This text is for common informational and academic functions solely. It shouldn’t be construed as monetary recommendation because the creator, Ted Stavetski, just isn’t a monetary advisor.
Ted Stavetski is the proprietor of Do Not Save Cash, a monetary weblog that encourages readers to take a position cash as an alternative of saving it. He has 5 years of expertise as a enterprise author and has written for firms like SoFi, StockGPT, Benzinga, and extra.
