Is the Get together Over for Lululemon Inventory?

Lululemon (LULU -3.46%) inventory closed at its all-time excessive of $511.29 on Dec. 29, 2023. That 5,581% achieve from its split-adjusted IPO value of $9 in July 2007 would have turned a $10,000 funding into $568,100. The yoga and athletic attire retailer impressed the bulls with its resilience throughout the early days of the pandemic and its bold development plans.

However immediately, Lululemon’s inventory trades at about $220. It misplaced its luster as its North American development stalled out and it confronted harder competitors from smaller and cheaper manufacturers, and tariffs exacerbated that stress. So is the social gathering over for this former high-growth inventory?

Picture supply: Getty Photos.

What occurred to Lululemon over the previous three years?

Lululemon established an early mover’s benefit within the premium yoga attire area, and it profited from the fast development of the athleisure market. It expanded its digital market and opened extra brick-and-mortar shops to spice up its direct-to-consumer gross sales, and it used free yoga lessons and different group occasions to lock in its prospects.

Again in 2019, Lululemon launched its “Energy of Three” plan to double digital revenues, double its males’s revenues, and quadruple its worldwide revenues from fiscal 2018 (which led to February 2019) over the next 5 years. It achieved all of these objectives forward of schedule, even because it quickly closed a few of its shops throughout the pandemic.

That success prompted Lululemon to launch a brand new “Energy of Three x2” plan in 2022, which set the identical objectives for doubling its males’s revenues and quadrupling its worldwide revenues from fiscal 2021 to fiscal 2026. It anticipated that new plan to just about double its annual income from $6.3 billion in fiscal 2021 to $12.5 billion in fiscal 2026.

However over the previous three years, its top-line development decelerated. Its gross sales of girls’s attire in North America slowed down because it grappled with weak client spending and harder competitors from Costco‘s (COST -0.72%) Kirkland attire, Amazon‘s (AMZN -0.35%) personal label attire, and smaller manufacturers like Alo Yoga, Vuori, and Gymshark.

Knowledge supply: Lululemon. FY = fiscal yr. 

Lululemon’s abroad growth and new merchandise (together with Glow Up, Daydrift, and BeCalm) could not offset its mushy gross sales of girls’s attire within the U.S. market. To make issues worse, its chief product officer Solar Choe, who had held that key place since 2018, abruptly resigned final yr.

All of these challenges eroded Lululemon’s pricing energy, so it relied extra closely on markdowns to drive its income development. It additionally absorbed the upper prices from inflation and abroad tariffs as an alternative of passing these bills onto its shoppers. Regardless of that stress, its gross margin nonetheless expanded from 55.4% in fiscal 2022 to 59.2% in fiscal 2024 because it lowered its freight and enter prices, reined in its markdowns, and prioritized gross sales of higher-margin merchandise in higher-margin markets.

What is going to occur to Lululemon over the following three years?

Throughout Lululemon’s newest convention name for the primary quarter of 2025, CEO Calvin McDonald mentioned he was “positively not joyful” with the model’s efficiency within the U.S. — and that its shoppers stay “cautious” and “discerning” on this uneven macro setting.

Nonetheless, McDonald reaffirmed the corporate’s dedication to its “Energy of Three x2” targets. Subsequently, buyers can nonetheless anticipate Lululemon to generate at the very least $12.5 billion in income in fiscal 2026 — however that will solely characterize a compound annual development price of 8.6% from fiscal 2024.

Analysts are much less optimistic. They anticipate its income to solely develop 6% to $11.2 billion in fiscal 2025 (which ends in February 2026), 7% to $12.0 billion in fiscal 2026, and 6% to $12.7 billion in fiscal 2027. Its EPS is anticipated to remain almost flat in fiscal 2025, rise 6% in fiscal 2026, and develop 4% in fiscal 2027.

We should always take these longer-term estimates with a grain of salt, however they counsel the corporate will preserve struggling within the saturated North American market and rely extra closely on its abroad development. It additionally most likely will not launch one other “Energy of Three” development plan sooner or later.

From a development inventory to a worth inventory

Lululemon’s inventory seems to be low-cost at simply 15 occasions this yr’s earnings, but it surely deserves that decrease valuation as a result of its core development engine is cooling off. Its draw back potential could be restricted, but it surely will not revisit its all-time highs anytime quickly. For now, the social gathering is over for Lululemon — but it surely might ultimately discover recent methods to revive its model.