For over a decade, Lululemon (Nasdaq: LULU) has had a stranglehold on the athleisure vogue market. Luluemon inventory hit a excessive of roughly $511/share at the start of 2024. However, since then, it has tumbled 40% – dangerous sufficient to make one of many worst-performing shares within the S&P 500. So, that is the proper time to scoop up shares of Lulu at a reduction? Or is that this the start of the tip for Lulu’s dominance?

Let’s have a look.

Lulu’s Most Current Quarter

I dove into Lululemon’s most up-to-date quarterly earnings report (June sixth) to get an thought of how the corporate has been performing not too long ago. Right here’s what I discovered:

1. Web Income: $2.2 billion, up 10% yearly. 
2. Gross Revenue: $1.3 billion, up 11% yearly
3. Stability Sheet: The corporate ended the Q1 2024 with $1.9 billion in money
4. Steerage: For Q2 2024, Lululemon expects internet income of $2.4 – $2.42 billion, which might symbolize progress of 9% to 10%
5. Inventory Repurchases: The Board of Administrators approved a $1 billion inventory buyback program.

At first look, these outcomes usually are not dangerous in any respect. However, they’re additionally not overwhelmingly good – particularly for a corporation that ought to nonetheless be rising pretty rapidly. 

CEO Calvin McDonald acknowledged that there was sturdy momentum in worldwide markets final quarter. He additionally confirmed that the corporate left cash on the desk by not having sufficient merchandise in inventory to fulfill excessive demand. McDonald additionally acknowledged that he’s assured within the firm’s skills transferring ahead. 

Wanting forward, the corporate is specializing in product innovation, visitor expertise, and market growth. Lululemon additionally expects progress in these areas:

• Males’s Attire 
• E-commerce
• Worldwide internet income: Worldwide income at present makes up simply 21% of the corporate’s gross sales. Lulu hopes to quadruple 2024 int’l income relative to 2021.

Nevertheless, so far as dangerous information, Lululemon introduced the departure of its Chief Product Officer, Solar Choe. In accordance to some reviews I learn, Choe was a driving drive behind product innovation at Lululemon. The corporate will miss Choe and has needed to reshuffle its inner construction following this departure. 

So, what does all this imply for traders?

Time to Purchase Lululemon Inventory?

With Lululemon inventory down 40% YTD, it would seem to be time to deploy Warren Buffet’s well-known recommendation of “purchase an awesome firm at value.” However, I don’t suppose this is applicable to Luluemon inventory proper now. I consider that there’s draw back potential forward for Lululemon thanks to 3 danger elements.

Danger #1 – Elevated Competitors

Years in the past, Lululemon was nearly alone within the athleisure area. This wasn’t all too stunning, because the firm primarily created athleisure. Positive, you might argue that Nike (NYSE: NKE) or Adidas (OTCMKTS: ADDYY) had been semi-competitors. However, Lululemon was at all times in a vastly totally different area than these two all-in-one athletic attire giants. Lulu goes after a way more area of interest, high-end market.

Lulu’s days of monopolistic energy are rapidly coming to an finish. As we speak, Lululemon faces steep competitors from firms like Alo, Vuori, Health club Shark, Fabletics, and plenty of smaller manufacturers. Granted, none of those firms have grown to the dimensions of Lululemon (but). However, they’re all nonetheless formidable opponents:

1. Vuori: This San Diego-based model is price an estimated $4 billion and is contemplating an IPO. It has additionally differentiated itself from Lululemon by primarily concentrating on males (an space that Lulu is seeking to for progress). For what it’s price, I (a 28-year-old male) personal garments from each manufacturers and like Vuori for a handful of causes.
2. Alo: Alo is price an estimated $10 billion. It gained recognition because of its savvy influencer-first method to advertising.
3. Fabletics: Fabletics thought-about an IPO in 2021 that will have valued it at $5 billion. I couldn’t discover any numbers more moderen than this.
4. Gymshark: Gymshark is valued at slightly below $2 billion. It’s additionally primarily based in the UK which may hinder Lulu’s worldwide growth plans.

With a market cap of slightly below $40 billion, these firms nonetheless pale compared to Lululemon. However, that’s not the purpose. The purpose is that roughly 10 years in the past Lululemon was the one title in high-end athletic attire. As we speak, there are many locations the place prospects should buy a $128 pair of leggings or pants. Two of those rivals (Vuori and Gymshark) additionally function in verticals that Lulu is seeking to for progress.

Gross sales knowledge for the 4 rivals listed above is essentially personal. So, I used one other metric to check them to Lululemon: Instagram followers (Nasdaq: META). Right here’s how they stack up:

1. Gymshark: 7 million followers (Gymshark Girls has 3.5 million)
2. Lululemon: 5 million 
3. Alo: 2 million 
4. Fabletics: 2 million
5. Vuori: 1 million

In the event you’re pondering of shopping for Lululemon inventory, it’s a must to take into account how this competitors may eat into Lululemon’s progress over the subsequent 5-10 years. Lululemon has such a head begin so it’s unlikely that it’ll get absolutely dethroned from its high place. However, the corporate additionally gained’t benefit from the monopolistic place that it had over the previous 12 months. Loads of former-Lulu male prospects could begin choosing Vuori whereas abroad athletes could select Gymshark.

Danger #2 – Dupe Tradition 

The rise of dupe tradition is one other challenge that would damage Lululemon inventory within the coming months. A “dupe” or duplicate is only a knockoff of an present product. 

The price of dwelling within the US has risen dramatically prior to now few years. In response, US shoppers are turning to dupes greater than ever. In Lululemon’s case, extra individuals are shopping for off-brand yoga pants for $40 as a substitute of shelling out $128 to purchase Lulus. In the event you seek for #Lululemondupe on TikTok, you’ll see tons of movies on the topic that routinely get tens of millions of views. I additionally took a take a look at Google Tendencies knowledge, which confirmed that web searches for “lululemon dupe” have been persistently trending increased since 2020. 

Lululemon isn’t the one firm that has to take care of dupes. In truth, most high-end manufacturers can count on their merchandise to get copied. For instance, Nike (Nasdaq: NKE) has at all times had a problem with pretend Air Jordans however it has by no means appeared to harm the corporate’s income.

Proper now, it’s onerous to inform if dupe tradition is hurting Lululemon’s gross sales. However, it’s a large enough challenge that Lululemon felt the necessity to addressed it. Both manner, dupes are one other danger issue for Lulu transferring ahead.

Danger #3 – Gen Z’s Saggy Pants Pattern

Lululemon has made a dwelling off of its skin-hugging yoga pants. However, from what I’ve seen, Gen Zers present a choice for baggier sweatpants, hoodies, and t-shirts.

 A 5-year Google Tendencies chart for “dishevelled pants” helps this thesis. However, apart from that, I don’t have a lot tangible knowledge to level to for this development. It’s simply one thing I’ve noticed on social media and in my very own life. In my expertise, tighter garments appear to be on their manner out whereas overly dishevelled clothes is in. I scanned Lululemon’s web site and didn’t discover something that regarded like they’ve caught on to this development. Lululemon additionally launched in 1995 and had a stranglehold on shoppers within the 2000s and 2010s. However, by this level, Lulu may not resonate as a lot with youthful consumers. If this doesn’t change, I wouldn’t be shocked if Lululemon began to get stereotyped as an “older folks model” within the coming years and misplaced floor to “cooler” upstarts (just like the aforementioned Vuori, Alo, Gymshark, and so on). That stated, vogue tendencies differ by area and might change rapidly. 

That is admittedly the weakest danger on this record. However, it’s nonetheless a possible danger nonetheless. 

Now, again to the query at hand.

Ought to You Purchase Lululemon Inventory?

I wouldn’t. It looks like Lulu is going through fairly a number of headwinds over the approaching months. The corporate simply misplaced a key government in Solar Choe. It’s additionally going through steep competitors within the actual verticals the place it’s hoping for progress (males’s put on and worldwide markets). The inventory has additionally been getting punished up to now this 12 months, which is an indication that investor sentiment has modified for Lululemon – maybe the hardest impediment to beat. 

I don’t essentially suppose that Lululemon inventory will tank over the approaching months. However, it’s seemingly that Lulu will underperform the market or at greatest break even. Even when Lulu hits its objective of 10% income progress in 2024, I don’t see traders getting notably excited. 

That stated, vogue tendencies can change on a dime. All it takes is the blowout success of 1 product to alter the narrative – a feat that Lulu has completed many instances.

I hope that you just’ve discovered this text worthwhile with regards to discovering whether or not or to not purchase Lululemon inventory. In the event you’re curious about studying extra then please subscribe beneath to get alerted of latest articles.

Disclaimer: This text is for normal informational and academic functions solely. It shouldn’t be construed as monetary recommendation because the writer, Ted Stavetski, just isn’t a monetary advisor.