Shares of Lululemon slid $19.26, or 4.8 percent, to $385.40 after the yoga-themed retailer announced an ambitious five-year growth plan to double its sales by 2026. Analysts were generally bullish on Lululemon’s growth plan, with a few concerned about the stock’s lofty valuation.
The dip comes after the stock has had a strong run-up in recent weeks after sliding below $300 in early March. Details provided by Lululemon on Wednesday at its Analyst Day event included:
- Sales are projected to double from $6.25 billion in 2021 to $12.5 billion by 2026. The CAGR (compound annual growth rate) is 15 percent over the five years.
- Sales are expected to double in men’s from $1.54 billion, double in digital from $2.78 billion and quadruple in international from $957 million. Women’s and North America are each expected to generate a low-double-digit CAGR, while stores are expected to grow annually in the mid-teens. Annual square footage growth is projected in the low double-digits.
- Product innovation is expected to drive continued growth within Core Performance categories (Run, Train, Yoga, On The Move/OTM) with a focus on leveraging franchises supported by expansion into Play (Tennis, Golf, Hike) and new categories (Footwear).
- Building brand awareness and community engagement is expected to be helped by a shift in investments toward paid media and sports marketing, the recent launch of a trade-in/resale program and the fall launch of a two-tier membership program.
- EPS growth is expected to outpace revenue growth with modest operating expansion annually.
- Lululemon said it has only 1 percent of the $650 billion premium athletic wear market. The brand’s share of activewear is 5 percent in North America and below 1 percent in international markets. Unaided awareness is 25 percent in the U.S., 48 percent in Canada, 19 percent in Australia/New Zealand, 15 percent in the U.K., 7 percent in China, and 3 percent in France/Germany.
The following is a summary of analyst views on the growth plan:
Barclays maintained its “Overweight” rating and slightly raised its price target to $450 from $441. Adrienne Yih wrote in a note, “LULU’s targets in FY26 are slightly ahead of consensus and embed a continuation of strong growth trends on top of solid recent performance. Category expansions in men’s, footwear, golf, tennis, and outdoor are all additive to the business and introduce new customers to the brand beyond core women’s yoga, growing awareness in a massive TAM for healthy/active lifestyle. The brand remains relatively underpenetrated internationally with lower brand awareness and, in our view, can continue to have outsized square footage growth in conjunction with continued strength in the margin accretive digital channel. Lastly, new business models such as memberships, resale, and Mirror can increase customer retention and frequency of buying occasions with additional touchpoints.”
Wells Fargo reiterated its “Equal-Weight” rating at a price target of $370. Ike Boruchow wrote, “Considering the momentum in LULU’s business, it was not surprising that LULU’s Analyst Day was a bullish affair, focusing on the company’s working formula (product innovation, international, digital, stores) that helped them achieve their original $6B 2023 target two years early, and setting the stage for a realistic 15 percent rev growth CAGR through 2026 towards $12.5B in revenues.”
Boruchow said that compared to Lululemon’s 2019’s Analyst Day, the key differentiated drivers were the focus on core product innovations emphasizing building core categories and key franchises, a “more formalized marketing approach” to drive brand awareness versus its traditional grassroots approach, working to quadruple international to 30 percent of sales, balanced plans for growth between digital and stores, and the launch of its multi-tier loyalty program.
Nonetheless, Wells Fargo’s “Equal-Weight” rating on the stock reflects the stock’s valuation, at 41x/36x Wells Fargo’s 2022/23 estimates. Boruchow wrote, “While we have high confidence in LULU’s ability to execute, especially considering prior 2023 targets were achieved early, and LULU has greater visibility to their business than most, especially in the resilient athletic category, valuation keeps us on the sidelines.”
Bank of America Securities reaffirmed its “Buy” rating at a $450 price objective. Lorraine Hutchinson wrote, “The key message was the next leg of growth will remain well balanced, with plenty of untapped opportunities across channels, geographies, and product lines.”
The analyst called out upcoming innovations in its core categories of Yoga, Run and Train, the “significant opportunity” in women’s with the On the Move (OTM) range and the “overwhelmingly positive” response to its first women’s footwear line with men’s arriving in 2023. Hutchinson wrote, “Importantly, the plan to double the total business is not contingent on footwear. Management expects footwear and the revamped Mirror business will have an MSD revenue penetration over time. Other exciting growth opportunities include Tennis, Golf, Hike (launching soon), and various sustainability initiatives.”
Other takeaways included its international growth potential led by China and the shift to more paid media/partnerships to drive brand awareness.
Hutchinson said about her “Overweight” rating, “We believe a premium to LULU’s peer group average of high-growth consumer companies is justified given LULU’s relatively stronger growth prospects including a productive U.S. rollout, rapid e-commerce growth and international expansion.”
Morgan Stanley reiterated its “Equal-Weight” rating and lifted its price target to $332 from $300. Kimberly Greenberger wrote, “We like LULU’s thoughtful approach to category and geographic expansion and its drive to find new ways to engage with both existing and new customers via resale and loyalty programs.”
Greenberger called out Lululemon’s expansion into core categories, with newer categories such as golf apparel and footwear being incremental to its growth. She wrote, “What stood out to most to us is that management’s approach is to 1) focused on executing the core offering first, 2) let the guest lead them into adjacencies that are solving for an unmet need or where they have a right to win, and 3) test, learn and iterate to assess category/product viability. This gives us confidence that management is thoughtfully expanding the assortment.”
She also said the broader marketing approach should help increase brand awareness and applauded the move to open up Mirror to community studios and additional content. She sees footwear as a way to gain more wallet share with existing female shoppers but does not expect the category to become a “meaningful portion” of revenue in the near or long term. Greenberger added, “We also caution limited historical precedent for apparel-rooted businesses successfully scaling performance footwear inside of 10-years.”
Cowen reiterated its “Outperform” rating and trimmed its price target to $497 from $507. John Kernan wrote that Lululemon’s product versatility had enabled it to find success beyond Yoga into Run, Train and On The Move, with more recent forays into Play categories of Tennis, Hike and Golf. Kernan wrote, “The brand’s ability to identify and fulfill unmet needs within the Sweatlife is drawing new guests to Lululemon and retaining existing guests through a greater share of their wallet and closet. Materials innovation and design are critical competitive factors behind the brand’s ability to maintain versatility.”
The analyst further highlighted the focus on building stronger customer relationships and community with the recent launch of its trade-in/resale program and planned membership program launch.
Kernan wrote, “We have confidence that new product, integrated marketing and online momentum combined with loyalty, a healthy high-end customer demographic and athleisure fashion trends will yield traffic, improving conversion and comps. Our survey indicates a high degree of loyalty and conversion levels should increase as we expect the new product to incorporate fashionable versatility.”
Citi Research has a “Neutral” at a price target of $400. Paul Lejuez cited the strategic change in marketing among the event’s highlights. He said, “LULU has long been committed to grassroots marketing. It is what has helped establish the brand’s authenticity early on in the brand formation stage, and they have stuck with that program as they have grown into new markets. Although they will continue with their grassroots marketing, they are making a strategic change to layer in a more modern approach to amplify the brand and expand their customer base. They will look to do more sports marketing and partnerships and use elite athletes that have a large reach and share their values as brand ambassadors in the hopes of reaching a larger number of potential customers in a more efficient way.”
Lejuez added that Lululemon’s same-store sales momentum has been among the best in retail, and margins have expanded almost 400 basis points since 2015. He said, “Product innovation continues to drive strong results in seemingly developed categories such as women’s pants, the men’s business is a big opportunity, and the customer has given LULU license to broaden into new categories. While COVID-19 disruptions will be a near-term headwind, there is no change to LULU’s long-term earnings power. However, with the LULU being valued as one of the most expensive specialty retail concepts ever, we believe the risk/reward is fairly balanced.”
B. Riley Securities reiterated its “Buy” rating at a $487 price target. Susan Anderson wrote, “A key takeaway from the Analyst Day was how LULU’s unaided brand awareness is only ~25 percent in the U.S. compared to other competitors around 85 percent to 90 percent (likely NKE) with men’s and nearly all international markets even lower. We believe this presents a significant opportunity for LULU to continue to expand their door footprint and improve their existing store productivity as they build more awareness and attract new customers. Overall, we see an opportunity for LULU to maintain +DD growth with its multiple levers of growth (footwear, lifestyle apparel, international, mens), brand awareness opportunity, and continued innovation to drive consumer demand.”
Stifel reiterated its “Buy” rating at a $500 price target. Jim Duffy wrote, “Encouragingly, this Power of 3 (x2) strategy is not dependent on new or transformational initiatives but rather an extension of strategies that drove outperformance since 2019. Big picture, LULU is enviably positioned at the intersection of powerful secular trends, and the brand’s holistic approach to well-being provides competitive distinction. Contemplating 16 percent EPS CAGR to $16/share-share in FY26E, shares are currently valued at 32x P/E on earnings discounted at a 10 percent rate three years to 2023E. We view this as an attractive entry point and continue to view LULU shares as a solid core holding for growth investors. We also see a capacity for earnings growth upside, particularly early in the five-year window.”
J.P. Morgan maintained its “Overweight” rating at a price target of $455. Matt Boss called out the continuing opportunity to expand in North America driven by continued product innovation, increasing unaided brand awareness (only 25 percent in the U.S. currently, with men’s at 11 percent versus women’s at 38 percent). Omnichannel growth and expansion of new categories (footwear) to drive a brand halo around core categories.
He noted that Lululemon’s detailed “balanced growth drivers” across men’s/women’s, North America/International and active/On the Move categories. Boss wrote, “Further, the product playbook is firmly intact across categories, notably (1) Core Performance: Run, Train, Yoga, and On the Move driven by accelerated tailwinds to Active and Casualization with a large opportunity in Women’s On the Move following proven success in men’s, (2) Play—Golf/Tennis/Hike, and (3) Footwear: very strong initial response to women’s launch in April 2022, with men’s launch coming in 2023.”
Photo courtesy Lululemon