Lululemon Athletica Inc., a renowned athletic apparel retailer, has been a darling of the stock market for years, celebrated for its high-quality products and impressive growth trajectory. Known for its yoga pants, leggings, and other athletic wear, Lululemon has built a loyal customer base and a powerful brand synonymous with active lifestyles and wellness.
Founded in 1998 in Vancouver, Canada, Lululemon has experienced meteoric growth, expanding from a single yoga studio turned apparel store to a global presence with hundreds of stores worldwide. The company has consistently reported strong revenue growth, driven by its innovative product lines, community-based marketing, and a strategic focus on women’s and men’s athletic wear. Over the years, Lululemon has also successfully expanded into new categories such as athleisure, outerwear, and footwear, further cementing its position in the market.
However, despite its impressive track record, Lululemon’s stock has recently experienced a significant decline, plummeting by approximately 40% year-to-date. This sudden drop has left investors and market analysts questioning the underlying causes and pondering whether there lies an opportunity amidst the turmoil.
In this article, we will delve into the potential reasons behind the sharp decline in Lululemon’s stock price, examining factors such as market dynamics, company performance, and external economic influences.
Challenges
On the surface, Lululemon’s Q1 2024 results may appear robust, primarily due to strong growth momentum in international markets, particularly in China. This international success, however, has masked underlying weaknesses in the U.S. market, which remains a core revenue driver for the company.
Signs of softening demand in the U.S. first emerged during the crucial holiday shopping season in Q4 2023, with a noticeable slowdown in comparable-store sales. This trend continued into Q1 2024, where U.S. sales increased by a mere 2% year-over-year, raising concerns about the sustainability of Lululemon’s long-term growth strategy.
Adding to these challenges, the departure of Sun Choe, Lululemon’s Chief Product Officer, was announced in May 2024. This news came just months after the company warned of softer consumer demand in the U.S. and reported slower sales growth in North America during Q4 2023.
Many analysts have viewed Choe as an instrumental figure in Lululemon’s success over the past seven years. Her departure led to a 7% decline in the company’s stock price in a single day. Lululemon introduced an ‘evolved’ organisational structure to compensate for Choe’s exit, elevating Jonathan Cheung to lead product design and innovation and creating a new Chief Brand & Product Activation Officer role for Nikki Neuburger. However, the company decided not to replace the Chief Product Officer position, amplifying concerns about its ability to navigate operational challenges effectively.
In addition to internal factors affecting Lululemon’s performance, external forces such as increased competition have compounded its woes. The athleisure sector has witnessed a surge in competition from emerging brands like Alo and Vuori, intensifying pressures on Lululemon’s market share. Competing with these trendy newcomers presents significant challenges for Lululemon as it strives to maintain its leadership position in athletic apparel.
Undervalued opportunity?
Despite the challenges faced by Lululemon in its core U.S. market, the company’s international growth remains impressive, particularly in China. The management has set ambitious goals, aiming for international markets to contribute at least 50% of Lululemon’s total revenue. This strategic focus on international expansion underscores the company’s potential to sustain its growth trajectory and provides a substantial buffer against domestic volatility.
Moreover, the slowdown in the U.S. business appears to be temporary. During the latest earnings call, Lululemon CEO Calvin McDonald acknowledged:
We had some missed opportunities in our colour palette, particularly in some key categories such as our legging business, where we didn’t have enough colour, newness… We came into the year with missed opportunities across our size profile, particularly our smaller sizes. All of this is within our control.
This highlights that the majority of the internal issues faced by Lululemon’s U.S. operations appears to stem from inventory mismanagement rather than a fundamental decline in demand. If so, these issues, being operational and within the company’s control, can be resolved relatively easily.
Lululemon has a history of effectively addressing similar challenges. The brand’s agile and responsive approach to market demands has been a key driver of its success. By correcting inventory mismanagement and refining its product offerings, Lululemon could swiftly return to its growth path in the U.S. market.
Valuation
Lululemon’s stock is trading at a trailing price-to-earnings (P/E) ratio of around 25, one of the lowest levels in the past decade for a company that has consistently delivered double-digit growth. This relatively low P/E ratio suggests that the market is pricing in uncertainty regarding Lululemon’s ability to overcome its recent challenges, particularly in the U.S. market.
If Lululemon can successfully address its inventory mismanagement and operational issues in the U.S., the company is well-positioned to regain momentum. CEO Calvin McDonald has acknowledged these challenges and emphasised that the company is taking proactive steps to rectify them, underscoring Lululemon’s commitment to maintaining its growth trajectory.
This valuation could present a buying opportunity for investors who believe in Lululemon’s potential. The company has historically driven growth through strong brand loyalty, innovative product lines, operational effectiveness, and market appeal.
The fifth perspective
Lululemon’s current valuation presents an intriguing scenario for investors, given its strong competitive advantage through its solid foundation in the athleisure market and its loyal customer base. However, investors should be mindful of the fashion industry’s inherent volatility and unpredictability, which introduce significant risks to Lululemon’s business model.
History has shown that even renowned brands like Under Armour can suffer due to shifting trends and changing consumer preferences. Therefore, any investor considering Lululemon should navigate carefully and maintain a balanced perspective.
I’m wondering if Lululemon might be a repeat of Under Armour. These types of fashion/sportswear companies often seem to have a rapid ascent from nothing and then drift downwards. I think there’s a limit to how much ladies will spend on yoga leggings (even if they do flatter their bottoms!). There always seem to be lower-priced copy-cats that emerge leading to margin compression.
Oh yes, I remember the hype surrounding Under Armour as well. It even became the second biggest sports brand in the U.S. and then… it just faded out. Before that, we have Reebok, Puma, etc but none seem to hold their brand power like Nike has. The closest is Adidas but they’re bigger in Europe. Maybe Lululemon can endure due to its niche in yoga. It’ll interesting to see how it plays out.