Lululemon: Exploring New Markets And Product Categories (NASDAQ:LULU)

Funding Thesis

Lululemon Athletica Inc.’s (NASDAQ:LULU) model continues to have a powerful presence each domestically and internationally, presenting untapped alternatives. The corporate’s sturdy development is supported by varied components, together with untapped worldwide markets, important development within the males’s section, enlargement into new product classes like private care and footwear, and the continual development of the e-commerce enterprise alongside its core North America enterprise. I count on LULU to put up mid-teens income development and high-teens earnings development till FY26, with a average enhance in working margin pushed by gross margin enhancements.

Q1 Overview and Outlook

LULU achieved spectacular leads to the primary quarter of 2023, surpassing expectations in varied key metrics, together with gross sales, gross margin, promotions, working bills, earnings per share, and stock administration. The corporate stays a frontrunner within the athletic and athleisure class, even amid a difficult shopper setting. The corporate’s success is attributed to its deal with product innovation, the introduction of latest classes, enlargement into new geographic markets, and efficient model consciousness initiatives, which have helped entice new clients and set up robust connections with its community-based strategy.

The corporate’s worldwide efficiency, particularly in China, was excellent, experiencing a 79% important development. Each males’s and girls’s merchandise, in addition to gross sales by bodily shops and digital channels, noticed double-digit development. Wanting forward, LULU expects its development to be fueled by elevated buyer visitors and the acquisition of latest clients by the introduction of latest product classes. The corporate has successfully managed its stock by a various product combine, together with new colours and modern merchandise, similar to golf, tennis, footwear, and equipment, launched in February, which have resonated nicely with clients. With a powerful presence in China, I count on LULU to generate sturdy gross sales and margin development all year long. Its strategic positioning makes it well-prepared for each difficult financial cycles and durations of restoration, making it a sexy funding choice.

Worldwide Enlargement Stays an Alternative

Lululemon’s core markets overseas — Australia, South Korea, the UK and Germany — will stay key to driving development because the model doubles down on product diversification, males’s and e-commerce in its 4 most mature markets. Leveraging its local-ambassador program can increase engagement and consciousness in these areas. Constructing on group with its metropolis ambassador program, launched in 2021 in 9 international cities, together with Seoul, Shanghai, London and New York, might convey native relevance to the model and drive larger engagement. The profitability of LULU’s worldwide enterprise turned barely constructive in FY18, because the income from Asia and Australia greater than offset losses in Europe. Regardless of worldwide gross sales at present accounting for under about 17% of the entire and the worldwide section being marginally worthwhile, there’s a important development alternative for LULU outdoors its dwelling market.

At only a mid-teens share of gross sales, Lululemon has loads of room to development its income from worldwide gross sales, pushed by features in China and rising core markets and getting into new international locations throughout Asia, Europe, the Center East and Africa. Although Lululemon has gained market share quickly, it solely captures 1% of the $650 billion international premium athletic-wear market and has a retail presence in simply 18 international locations. In 2022, it entered Spain, the primary new market in Europe since 2019. The corporate can be planning to broaden into Italy and Thailand.

China is on the forefront of Lululemon’s virtually $4 billion international-sales alternative, with features to be pushed by elevated investments in digital, curated native advertising and marketing content material and region-specific assortments. LULU envisions China turning into its second-largest market outdoors the US by 2026, and the model has been steadily including round 20-30 new shops within the area annually. In China, yoga’s rising recognition provides sizable alternatives and accounted for 53% of worldwide gross sales in 2022. In 4Q, worldwide gross sales rose 35%, pushed by a greater than 30% acquire in China. China represented 8% of gross sales in 2022.

Distinctive Enchantment Resulting from Sustainability

Driving a sustainable pipeline of merchandise by raw-materials innovation might assist Lululemon entice clients that want manufacturers that resonate extra intently with their private views for extra sustainability in my opinion. The corporate is in search of to considerably change the way in which it sources and manufactures merchandise throughout all its key uncooked supplies — polyester, nylon, cotton, animal-derived and forest-based supplies. In 2021, Lululemon made an investment in Genomatica to create lower-impact plant-based nylon, with the final word objective of changing typical nylon, one of many largest uncooked supplies used to make Lululemon merchandise. Nylon is a $22 billion industry, and the power to craft a sustainable alternative will cut back the usage of non-renewable fibers and its waste and emissions within the course of.

Consumers in search of to attach with manufacturers which have a extra eco-friendly strategy is forcing many retailers and types to embrace sustainability. Millennials and Technology Z customers are typically extra environmentally acutely aware than different generations when looking for attire. PwC’s 2021 International Shopper Insights Pulse Survey revealed that Millennials are most probably to be occupied with sustainability throughout procuring, whereas Gen Z could also be principally aspirational about eco-friendly habits, although their beliefs translate much less into spending in contrast with Millennials. As extra manufacturers make extra significant connections with these customers, I believe there might be a large alternative to transform digital browsers into potential patrons.

Furthermore, Lululemon’s leap into the greater than $30 billion resale market gives it an outlet to take part within the round financial system, attain a extra value-focused shopper and acquire sustainability-minded customers. In 2021, Lululemon launched Lululemon Like New, the primary program to recycle calmly used attire, the place customers may give clothes one other life and earn a credit score with the model. This system was rolled out to all shops digitally in mid-2022. Lululemon is not the one retailer testing resale. Nike accepts gently worn sneakers, and Levi Strauss has a buyback program for its denims known as SecondHand. Hole, Macy’s, J.C. Penney and Walmart are amongst many others testing resale by a 3rd celebration or on their very own.

Monetary Outlook & Valuation

Lululemon tracked forward of targets in its first 12 months of a five-year plan, positioning it to succeed in $12.5 billion in forward of its objective, particularly because the athleisure class grows and momentum builds in China. LULU’s income rose 30% in 2022, forward of the 15% CAGR goal for 2022-26. Gross sales can rise within the mid-to-high teenagers in 2024 as new shops speed up development in China. The launch of its health app this summer time, the place customers can sweat with Lululemon with out a MIRROR, provides a brand new income stream and may propel membership. New spring merchandise or colorways in its hike, golf, and tennis collections, coupled with the launch of its Blissfeel Path shoe this summer time, are additionally catalysts for the academy.

The corporate is displaying robust momentum with sturdy income and earnings development, pushed by an efficient digital technique that continued to yield substantial development even through the international shutdown. Moreover, LULU has made enhancements to its provide chain processes, enabling the corporate to effectively handle stock within the present financial downturn. Moreover, the corporate’s model has been gaining recognition among the many youthful millennial and Gen Z customers, additional contributing to their success out there. Long run, I stay optimistic on Lululemon’s skill to fulfill its monetary targets, aided by its “Energy of Three x2” technique and the essential-membership program that already drew in additional than 9 million members.

LULU’s multiples have come down regardless of the enterprise persevering with to put up strong incomes beats. For context, LULU’s ahead PE a number of has hovered within the 40/25x space for the previous 2 years. The inventory just lately troughed to 24x however has rebounded to buying and selling at 32x at present. The deteriorating macro setting has weighed on the inventory, in my opinion, as LULU is just not proof against repercussions of prospects of a attainable U.S. recession; nonetheless, I view it as a resilient model resulting from its enlargement into new geographies, notably China, which is predicted to get well in FY23. LULU is without doubt one of the bestcomping attire retailers at this time, with robust visitors on-line and in-stores and relative resilience to the remainder of retail seeing extra risky outcomes. Therefore, I stay constructive on the corporate’s long-term prospects and examine the inventory’s present valuation engaging for an entry.

Funding Dangers

Regardless of important development alternatives in each home and worldwide markets, LULU faces challenges associated to effectively increasing its sq. footage whereas sustaining mid-single-digit comparable development by product innovation. The administration envisions enhancing gross margins from their present ranges within the mid/high-50s and concentrating on a mid-20% working margin. The corporate must proceed investing within the provide chain and supporting worldwide/omnichannel efforts and model constructing, which might put stress on margins and therefore on the inventory, particularly if the general enterprise setting stays unsure. Furthermore, the retail business is extremely aggressive in nature, and opponents might be able to compete extra successfully, leading to a lack of LULU’s market share.

Conclusion

LULU is a distinguished participant within the athletic attire business. I imagine the corporate possesses varied methods, similar to increasing its shops, getting into worldwide markets, and introducing new product classes, which may maintain robust income development. Lululemon has substantial potential for worldwide gross sales development pushed by robust efficiency in China, enlargement in core markets, and entry into new international locations throughout Asia, Europe, the Center East, and Africa. Lululemon at present solely holds 1% of the $650 billion international premium athletic-wear market, leaving loads of room for development. I’m bullish on the long-term prospects of the corporate and examine the inventory as a purchase.