🧘 Is Lululemon Stretching Beyond Yoga?

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🧘 Lululemon: Stretching Beyond Yoga?

After being sued by Nike (NKE) earlier this year over alleged patent infringement, athleisure giant Lululemon Athletica Inc. (LULU) is looking to put the bad press behind it. It is targeting doubling revenue to $12.5B by 2026. Is it realistic?

The Power Of Three

In April 2019, Lululemon announced the “Power of Three” growth strategy: driving revenue growth by prioritizing: a) “Product Innovation” and doubling the size of its men’s revenue by 2023; b) the “Omni” guest experience and doubling digital revenue by 2023; and, c) market expansion and quadrupling its international revenue by 2023, by expanding to China, APAC, and EMEA.

As of Q4 2021, Lululemon’s men’s segment has seen its two-year revenue Compounded Annual Growth Rate (CAGR) of 28%; the digital business has shown a two-year CAGR of 50%; international revenue has grown at a two-year CAGR of 41%. Essentially on track on all three counts.

Lululemon was one of the key beneficiaries of the stay-at-home workout trend as the seller of yoga wear pivoted into selling lifestyle apparel and accessories. Despite supply chain challenges in Q4 amid rising Omicron cases in the US, the company surpassed street expectations.

Key Highlights From Q4:

  • Revenue: $2.13B Vs $2.13B expected
  • Earnings per Share: $3.37 Vs $3.27 expected

Revenue grew 23% Y-o-Y in Q4. It managed to scale the $6B mark in revenue for the full year, a record. International revenue grew 50% Y-o-Y in 2021 (15% of the overall top line), and the EMEA business turned profitable for the first time. Mainland China’s 2-year revenue CAGR rose 60%.

Confident of achieving its 2023 revenue and earnings growth targets ahead of schedule, Lululemon announced “Power of Three X 2,” intending to double men’s and digital revenue and quadruple international revenue again by 2026.

In other words, the company plans to double today’s $6.25B revenue to $12.5B by 2026 with a CAGR of 15% between 2021 and 2026. Women’s business and North American Operations are expected to generate low double-digit revenue CAGR in five years. Store operations are projected to grow in the mid-teens. Annual square footage to grow in low double digits.

Do The Targets “Work Out?”

Gearing up for the challenge, the company is launching a two-tier membership program to build a strong base of loyal customers. The paid and free membership programs will have exclusive access to items, events, and fitness classes.

The free membership will give users early access to new product drops, exclusive items, and invitations to in-person community events. The paid membership of $39 per month will provide people with access to Mirror and provide workout content from studios like Rumble, Y7, Pure Barre, and DogPound, all of whom have partnered with Lululemon.

Going beyond traditional yoga wear, Lululemon ventured into women’s footwear and is also branching out into apparel for golf, tennis, and hiking. The challenge is that footwear is a low-margin business, while apparel for golf and tennis puts the company in direct competition with giants like Nike and Adidas.

Lululemon is also going nationwide with its resale program. Shoppers at its stores can now trade in used items, including pants, tops, shorts, jackets, and more, in exchange for an e-gift card. The “Lululemon Like New” program will partner with Trove, an industry expert in recommerce, to evaluate all return items, clean them, and check for potential resale.

Customers will earn $5 for tank tops, t-shirts, short and long-sleeve shirts, $10 for hoodies, sweatshirts, sweaters, pants, crops, leggings, and bags, while coats and jackets will fetch them $25.

The company also aims to open 70 new stores this year. Although Lululemon is prepared to grow inventory units by 29% this year, it expects supply chain disruptions to continue.

For this year, Lululemon expects revenue to grow ~21%. However, given its ambitious growth targets, there’s a lot of ground to cover. Brand awareness in China is a paltry 7%, compared to 48% in Canada and 25% in the US. Stiff competition means little room for error. It remains to be seen whether Lululemon’s lemonade is sweet or salty for shareholders in the future!

Market Reaction
LULU ended at $352.53, down 4.23%.

Company Snapshot 📈

LULU $352.53 -15.53 (4.23%)

Analyst Ratings (31 Analysts) BUY 61%  HOLD 32%  SELL 7%

Newsworthy 📰

Drag: Alphabet reports weak earnings and revenue on big YouTube miss (GOOGL -3.59%)

Challenges: General Electric cautions that outlook pressured by supply-chain disruptions (GE -10.34%)

Aftermath: Tesla loses $126B in value amid Musk Twitter deal funding concerns (TSLA -12.18%)

Bullish: Microsoft forecasts double-digit revenue growth on cloud strength (MSFT +4.47%) (Afterhours)

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