VALUATION HIGHLIGHTS

1. Direct to Consumer constitutes 52% of the Trefis price estimate for Lululemon Athletica's stock.
2. Retail Stores constitute 38% of the Trefis price estimate for Lululemon Athletica's stock.

WHAT HAS CHANGED?

1. Lululemon Tops Estimates in Q3

Lululemon posted strong results in the third quarter as comparable sales jumped 22%, and overall revenue rose 28% year-over-year (y-o-y) to $1.9 billion, which beat estimates of $1.81 billion. The apparel company continues to expand successfully abroad as revenue was up 41% internationally, but it faced some headwinds on the cost side with the gross margin down by 130 basis points to 55.9%.On the bottom line, earnings per share increased from an adjusted figure of $1.62 in the quarter a year ago to $2.00, edging out the consensus at $1.97.

Note:Lululemon's FY'21 ended on January 30, 2022. Q3 FY'22 refers to the quarter that ended on October 30, 2022.

2. Q4 guidance

Lululemon has called for revenue of $2.61 billion to $2.66 billion, up 23.5% from the quarter a year ago but slightly below analyst estimates at $2.63 billion. On the bottom line, it expects adjusted earnings per share of $4.20 to $4.30, which compares to the consensus of $4.30.

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.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

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.

BUSINESS SUMMARY

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.

SOURCES OF VALUE

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.

KEY TRENDS

Some of the key factors driving Lululemon's stock value are unique to the company. These include:

1. The "scarcity" model

Lululemon's stores are usually known for keeping a low inventory of new products and quick turnover of said inventory. This means that customers loyal to the brand are generally aware that if they like a product, they better purchase it right away because it might not be there the next time they visit the store. Additionally, the company rarely offers sales, which means that customers have to pay the full price for products at all times.

2. Scope To Expand

Lululemon is competing in the global sports apparel market, estimated to grow from around $182 billion in annual revenue in 2021 to $279 billion by 2029. That means the sports apparel market is projected to grow at a compound annual growth rate of $5 billion for the next eight years. To put that into context, Lululemon's revenue was just $6.3 billion in 2021.

3. Expensive products

Lululemon has crafted for itself a reputation as an apparel company that makes aesthetically pleasing, reliable, and functional products. While the company has been working on improving the fit and fabric of its products, it has still managed to gain for itself a strong and loyal customer base. These are some of the reasons why it manages to charge a high premium for its products.

4. Generalized trend towards fitness-related activities & health-conscious lifestyle

Lululemon's products are benefiting from a generalized trend toward fitness-related activities and health-conscious lifestyles. Following the recession, the private sector has stepped up spending on healthcare. The introduction of products like Apple's iWatch, Samsung's Galaxy Gear, and apps like Nike+ and Under Armour's MapMyFitness, can be seen as complementary to fitness and training apparel. As the costs of healthcare have been outsourced from the state to the private sector, individuals are likely to find treatments much more expensive than they did in the past. The result is a much more health-conscious society, taking precautionary steps far in advance to avoid those prohibitive and potentially fatal costs. These trends are driving the growing interest of urban dwellers in training, running, and other such activities. If these trends continue, consumer spending on such products is likely to rise. In that environment, a company with a unique retailing strategy, and a loyal customer base like Lululemon, is likely to benefit.

5. The company's growth strategy

Lululemon unveiled a new five-year growth plan named Three x2 in April 2022. The plan aims to roughly double its annual revenue from $6.3 billion in fiscal 2021 to $12.5 billion by fiscal 2026. The retailer plans to hit that target by doubling its men's and digital revenues as well as quadrupling its international revenue - relative to fiscal 2021.