For over a decade, Lululemon (Nasdaq: LULU) has had a stranglehold on the athleisure trend market. Luluemon inventory hit a excessive of roughly $511/share originally of 2024. However, since then, it has tumbled 40% – dangerous sufficient to make one of many worst-performing shares within the S&P 500. So, that is the proper 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 Latest 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 not too long ago. Right here’s what I discovered:
- Web 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 internet income of $2.4 – $2.42 billion, which might symbolize progress of 9% to 10%
- Inventory Repurchases: The Board of Administrators licensed a $1 billion inventory buyback program.
At first look, these outcomes aren’t dangerous 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 sturdy 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 talents transferring ahead.
Trying forward, the corporate is specializing in product innovation, visitor expertise, and market enlargement. Lululemon additionally expects progress in these areas:
- Males’s Attire
- E-commerce
- Worldwide internet income: Worldwide income at present 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 dangerous information, Lululemon introduced the departure of its Chief Product Officer, Solar Choe. In accordance to a couple studies I learn, Choe was a driving pressure behind product innovation at Lululemon. The corporate will miss Choe and has needed to reshuffle its inner construction following this departure.
So, what does all this imply for buyers?
Time to Purchase Lululemon Inventory?
With Lululemon inventory down 40% YTD, it’d look like time to deploy Warren Buffet’s well-known recommendation of “purchase an incredible firm at a very good worth.” However, I don’t assume this is applicable to Luluemon inventory proper now. I imagine that there’s draw back potential forward for Lululemon thanks to 3 danger components.
Threat #1 – Elevated Competitors
Years in the past, Lululemon was nearly alone within the athleisure house. This wasn’t all too stunning, for the reason that firm basically created athleisure. Positive, you may argue that Nike (NYSE: NKE) or Adidas (OTCMKTS: ADDYY) had been semi-competitors. However, Lululemon was at all times in a vastly totally different house 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. In the present day, Lululemon faces steep competitors from corporations like Alo, Vuori, Gymnasium Shark, Fabletics, and lots of smaller manufacturers. Granted, none of those corporations have grown to the dimensions of Lululemon (but). However, they’re all nonetheless formidable opponents:
- Vuori: This San Diego-based model is price an estimated $4 billion and is contemplating an IPO. It has additionally differentiated itself from Lululemon by primarily concentrating on males (an space that Lulu is seeking to for progress). For what it’s price, I (a 28-year-old male) personal garments from each manufacturers and like Vuori for a handful of causes.
- Alo: Alo is price an estimated $10 billion. It gained reputation due to its savvy influencer-first method to advertising.
- Fabletics: Fabletics thought of an IPO in 2021 that may have valued it at $5 billion. I couldn’t discover any numbers more moderen than this.
- Gymshark: Gymshark is valued at slightly below $2 billion. It’s additionally based mostly in the UK which may hinder Lulu’s worldwide enlargement plans.
With a market cap of slightly below $40 billion, these corporations 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. In the present day, there are many locations the place clients can purchase a $128 pair of leggings or pants. Two of those opponents (Vuori and Gymshark) additionally function in verticals that Lulu is seeking to for progress.
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
For those who’re considering of shopping for Lululemon inventory, you must think about how this competitors may eat into Lululemon’s progress over the subsequent 5-10 years. Lululemon has such a head begin so it’s unlikely that it’ll get totally dethroned from its high 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 could begin choosing Vuori whereas abroad athletes could select Gymshark.
Threat #2 – Dupe Tradition
The rise of dupe tradition is one other subject that might harm Lululemon inventory within the coming months. A “dupe” or duplicate is only a knockoff of an present product.
The price of dwelling within the US has risen dramatically up to now few years. In response, US customers are turning to dupes greater than ever. In Lululemon’s case, extra persons are shopping for off-brand yoga pants for $40 as a substitute of shelling out $128 to purchase Lulus. For those who seek for #Lululemondupe on TikTok, you’ll see tons of movies on the topic that routinely get hundreds of thousands of views. I additionally took a take a look at Google Tendencies information, which confirmed that web searches for “lululemon dupe” have been constantly trending larger since 2020.
Lululemon isn’t the one firm that has to cope with dupes. The truth is, most high-end manufacturers can anticipate their merchandise to get copied. For instance, Nike (Nasdaq: NKE) has at all times had a problem with pretend 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 subject that Lululemon felt the necessity to addressed it. Both means, dupes are one other danger issue for Lulu transferring ahead.
Threat #3 – Gen Z’s Dishevelled Pants Pattern
Lululemon has made a dwelling off of its skin-hugging yoga pants. However, from what I’ve seen, Gen Zers present a choice for baggier sweatpants, hoodies, and t-shirts.
A 5-year Google Tendencies chart for “saggy pants” helps this thesis. However, apart 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 means out whereas overly saggy 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 consumers. If this doesn’t change, I wouldn’t be shocked 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, trend developments fluctuate by area and may change shortly.
That is admittedly the weakest danger on this record. However, it’s nonetheless a possible danger nonetheless.
Now, again to the query at hand.
Ought to You Purchase Lululemon Inventory?
I wouldn’t. It looks like Lulu is going through fairly a number of headwinds over the approaching months. The corporate simply misplaced a key government in Solar Choe. It’s additionally going through steep competitors within the precise verticals the place it’s hoping for progress (males’s put on and worldwide markets). The inventory has additionally been getting punished to date 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 probably that Lulu will underperform the market or at greatest break even. Even when Lulu hits its aim of 10% income progress in 2024, I don’t see buyers getting significantly excited.
That mentioned, trend developments can change on a dime. All it takes is the blowout success of 1 product to alter the narrative – a feat that Lulu has completed many instances.
I hope that you simply’ve discovered this text worthwhile in relation to discovering whether or not or to not purchase Lululemon inventory. For those who’re involved in 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, will not be 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 a substitute of saving it. He has 5 years of expertise as a enterprise author and has written for corporations like SoFi, StockGPT, Benzinga, and extra.