Description
Lululemon (LULU) Short Thesis
2024/04/05
Executive Summary
ST: Lululemon is a high certainty short candidate in the short-run. It’s likely to miss sellside revenue consensus by 4-5ppt in 1Q24 (Q-end Apr-2024)
Suggest short LULU US when share price is above USD410 (implying 30x P/E based on my estimate), before next earnings date in May 2024. Cover the position after the earnings data, price target at USD300 (implying 22x P/E based on my estimate).
Company overview
Lululemon is a leading brand in women indoor training and yoga segment, with revenue of USD10b in FY23, +19% yoy. Below data quickly summarizes the brand’s positioning and strength.
- Strong in women’s indoor training and yoga: Women’s wear contributes >70% of company’s revenue
- Strong in apparel and just entered into footwear space. Launched women’s running shoes series in 2022, and men’s running shoes in 2024. Shoes contribute <5% of company’s revenue
- Strong in North America, and China is the fastest growing market.
US: >60% of revenue, +12% yoy in FY23
China: 12% of revenue, +60% yoy in FY23
Canada: 13% of revenue, +11% yoy in FY23
Others: 9% of revenue, +40% yoy in FY23
Public ownership: Lululemon is a crowded LO long. 89% of the shares are owned by LOs. The largest shareholders are as below. Given the ownership structure (slow-money dominant), it’s share price movement should lag its earnings.
Top shareholders / % shares outstanding
- FMR 14.4%
- Vanguard 7.7%
- Blackrock 7.3%
- State Street 3.8%
- Anamered Investments 3.8%
Thesis
Lululemon faces sales slow-down in its base market – US. Earnings under pressure for the next quarter (Q-end Apr-2024, to be reported in late May 2024)
- US accounts for >60% of company’s revenue. Other markets: Canada 13%, China 12~16%, others 11%
- Tracking data till Mar 17 suggested that US growth turned negative in F1Q24, while consensus still at +5% yoy
- It’ll be the first time that US market turn to negative growth
- The US decline contributes 4-5% drag to its 1Q24 revenue
Lulu still in its high-growth phase in China. However, the China growth along couldn’t amid US slow-down.
- China accounts for 12-16% of Lululemon’s revenue, and it’s the fastest growing market
- Multiple sources suggested that Lululemon is on track on deliver +30~40% revenue growth in China, largely in line with consensus at +39% yoy. No major upside surprise
According to Meritco shopping mall tracker (sample of 13, out of 128 Lululemon stores in China), Lululemon stores has 8.3% SSSG in Jan-Feb, and store counted increased 28 (or +28% yoy) in LTM. It adds up to revenue growth of +38% yoy.
Expert channel check suggested +35% yoy growth in China
Lululemon currently trades at 29x NTM P/E based on HCEPe EPS, or 28x based on consensus EPS -> in line with 2014-17 level.
- Its historical average NTM P/E is at 37x.
- When its revenue growth fell to 10-15% in 2014-17 from 30+% previously, the NTM multiple fell to 22-27x.
- In 2015-15, when Canada revenue growth turned negative, Lululemon’s valuation fell into 20-25x range.
Suggest short LULU US when share price is above USD410 (implying 30x P/E based on my estimate), before next earnings date in May 2024. Cover the position after the earnings data, price target at USD300 (implying 22x P/E based on my estimate).
Upside Risks
- Geography expansion: Still low penetration in EMEA, Asia ex-China, and LatAm. New markets may bring extra growth
- Product line expansion: Lululemon has launched women running shoe series in 2022, and now has expanded into men’s shoes. It also started to explore product lines in tennis, golf, and athleisure.
LT question: Has Lululemon brand peaked out?
Lululemon started to explore products in subsectors other than Yoga since 2022, such as running shoes, tennis, golf, and athleisure. If we compare Lululemon’s strategy with other brands, we can notice that product line expansion is a typical practice when the company’s major product line faces slow-down.
Take Under Armour as an example – UAA was the leader in indoor fitness segment, but later was overtaken by Lululemon. It enjoyed high growth before 2013 as the segment lacks competition. The brand was first focused on men’s series, and have brought up the strategy of “female focus” in 2013, and conducted multiple marketing campaign in 2013-14. The strategy saved its revenue growth for 1-2 years. However, the company’s female strategy wasn’t very successful due to its product design and competition from Lululemon. Starting 2017, the company’s revenue growth dropped to low single digit, and management entered into multiple subsectors, such as yoga, ski, and golf, but again wasn’t very successful. Other examples inlude Adidas and Allbirds.
It’s hard to say whether Lululemon’s growth has peaked out here, but it’s a clear signal that the management believes the growth should be supported by a second curve. After my visit to Lululemon stores, I personally think that Lululemon’s tennis and golf trial will be good, but running shoes and athleisure likely to be lukewarm.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
New product launching
Earnings release