Note:Lululemon's FY'21 ended on January 30, 2022. Q3 FY'22 refers to the quarter that ended on October 30, 2022.
Like other retailers, Lululemon's inventory levels have become inflated, jumping 85% from a year ago to $1.7 billion, though management said in the press release that it believes it is well positioned to support expected revenue growth in the fourth quarter.
Below are key drivers of Lululemon's value that present opportunities for upside or downside to the current Trefis price estimate for Lululemon:
Retail Stores Revenue Per Square Foot: The high retail productivity is an outcome of several successful retailing strategies, including, but not limited to, the maintenance of low inventories, utilization of customer feedback to improve product quality, and the quick renewal of products. However, in recent years, revenue per square foot in the retail space has declined. From $1,595 in 2018, this metric declined to $1,425 in 2019 and it further dropped down to only $755 in 2020. However, this figure increased to $1086 in 2021, due to increased economic activity after a long period of stores shutdown during the onset of pandemic. Going forward, we expect the average Retail Store Revenue Per Square Foot to reach approximately $1,500 by the end of our forecast period. If the figure exceeds our forecast and reaches $1,600, it would translate into a 5% upside to the Trefis price estimate. If the figure falls short of our forecast by about $100, there will be a ~5% downside to the Trefis price estimate.
Retail Stores EBITDA Margin: Another factor critical to Lululemon's cash profits is the high margins on the company's products. The demographic targeted by the company is higher-end consumers. As a result, its products were priced at much higher levels historically than similar products manufactured by companies like Nike, Under Armour, and Adidas. But that has changed in the recent past. Furthermore, the company has faced increasing costs. This has dampened the EBITDA margin. The figure had fallen from 27.6% in 2019 to about 24% in 2020. However, this metric recovered to around 26% in 2021. By the end of our forecast period, we expect the Retail Store EBITDA margin to stabilize around this level only. If the company becomes more profitable than our expectation and its margin comes in at around 28%, it would mean a ~5% upside to the Trefis price estimate. If the margins reach 22%, it would mean a ~10% downside to our price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for LULU at the top of the page.
Lululemon Athletica Inc. is a manufacturer of yoga-inspired athletic wear. The company's products include performance apparel and accessories for women, men, and young girls. The apparel assortment includes items such as fitness pants, shorts, tops, and jackets, and is designed for healthy lifestyle activities and general fitness.
Lululemon's products are sold through company-owned stores and showrooms, the company website, and several strategic partners. The company also sells products with small visual or design defects through its factory outlets or specially organized warehouse sales. Its products are manufactured in factories in Canada, the United States, Peru, China, Taiwan, South Korea, Israel, India, Bangladesh, Indonesia, Malaysia, Cambodia, Sri Lanka, Vietnam, and Switzerland.
Retail segment was the main earner for the company before the pandemic. Since 2020, the Direct-to-Consumer segment has outpaced the Retail segment's revenue growth, due to the change in the consumers' buying habits.
The company is engaged in creating yoga and fitness activity-based communities in the U.S. and Canada. The company organizes many fitness camps and has also entered into partnership agreements for the sale of its apparel with many athletic teams, yoga studios, and fitness facilities in the U.S. and Canada. Most of the company's retail sales are a result of the visibility the company gains from these interactive endeavors. Additionally, the company's wholesale program is based on identifying fitness and yoga studios, to which it partners and sells its products to.
The company also offers yoga studios and fitness club essentials like yoga mats, blocks, and straps.
Some of the key factors driving Lululemon's stock value are unique to the company. These include: