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lululemon athletica (LULU)

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WHAT HAS CHANGED?

  1. Latest Earnings
Lululemon announced its Q4 2018 results on March 27, 2019, followed by a conference call with analysts. The company beat market expectations for revenues and earnings for the quarter. LULU reported revenues of $1.2 billion in Q4 2018, 25.7% higher than in the previous-year period, whereas for the full year, revenue increased by 24.1% to $3.3 billion in 2018 from $2.6 billion in 2017. Higher revenue was mainly driven by the opening of 36 net new branded company-operated stores since Q4 2017, a comparable store sales growth of 7%, a whopping increase of 48.7% in ‘direct to consumer’ revenues due to increased traffic and better conversion rates, and over 9% growth in the company’s wholesale business. Earnings for the fourth quarter came in at $1.85 per share, much higher than $1.33 in Q4 2017, whereas for the full year earnings almost doubled to $3.63 per share in 2018. Higher earnings were driven by lower product costs, favorable mix of higher margin products and absence of any restructuring charges ($38.5 million restructuring charge related to ivivva operations recorded in 2017).

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 the recent years, revenues per square foot in the retail space has reduced considerably, with the trend reversing in 2016. From its all time high at $1,823 in 2012, revenues have dragged down to $1,407 in 2015 and then increased to $1,595 in 2018. By the end of our forecast period we expect the Average Retail Store Revenue Per Square Foot to reach approximately $1,726. If the figure exceeds our forecast and reaches $1,975, it would translate into a 10% upside to the Trefis price estimate. If the figure falls short of our forecast by about $400, there will be ~10% 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, and 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 has fallen from 39% in 2011 to about 25% in 2015. By the end of our forecast period, we expect the Retail Store EBITDA margin to be ~30.5%. If the company becomes more profitable than our expectation and its margin comes in at around 36.5%, it would mean a ~10% upside to the Trefis price estimate. If the margins fall to 20%, it would mean ~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 a small number of 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.

Going forward, the company is ready to increase the number of retail stores across the globe with increased international exposure in Asia, Australia and Europe. Until the company's Direct to Consumer revenue stream gains more proportion in sales, retail is expected to be the Lululemon's main bread earner.

SOURCES OF VALUE

The primary source of value for Lululemon is its Retail Segment. This is primarily because customers need to find the right style and fit for their needs and body type. It is for this reason that sales in the retail segments have more than trebled in the last 5 years. The company recognizes retail as an important revenue stream and have hence invested heavily in opening new retail stores in the U.S. as well as internationally.

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 around identifying fitness and yoga studios, which it partners with and sells its products to.

The company also offers yoga studios and fitness clubs 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 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.

  1. 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 high premium for its products.

  1. Generalized trend towards fitness-related activities & health-conscious lifestyle
Lululemon's products are benefiting from a generalized trend towards fitness related activities and health-conscious lifestyles. Following the recession, the private sector has stepped up its 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, and in that environment a company with a unique retailing strategy, and a loyal customer base like Lululemon, is likely to benefit.

  1. The company's renewed growth strategy
At the beginning of 2017, Lululemon was in need to overhaul its growth strategy to best suit the demands of the current apparel market. In this respect, like most of its competitors, it took to its "four pillar" approach. In this, the company is expected to focus on four particular areas to maintain its growth trajectory. These focus areas include - Men's, DTC, International Expansion and Product Innovation.

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