For over a decade, Lululemon (Nasdaq: LULU) has had a stranglehold on the athleisure trend market. Luluemon inventory hit a excessive of roughly $511/share in the beginning of 2024. However, since then, it has tumbled 40% – unhealthy 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 top for Lulu’s dominance?

Let’s have a look.

Lulu’s Most Latest Quarter

I dove into Lululemon’s most up-to-date quarterly earnings report (June sixth) to get an concept of how the corporate has been performing just lately. Right here’s what I discovered:

Web Income: $2.2 billion, up 10% yearly. 
Gross Revenue: $1.3 billion, up 11% yearly
Steadiness Sheet: The corporate ended the Q1 2024 with $1.9 billion in money
Steerage: For Q2 2024, Lululemon expects web income of $2.4 – $2.42 billion, which might characterize development of 9% to 10%
Inventory Repurchases: The Board of Administrators licensed a $1 billion inventory buyback program.

At first look, these outcomes usually are not unhealthy in any respect. However, they’re additionally not overwhelmingly good – particularly for an organization that ought to nonetheless be rising pretty shortly. 

CEO Calvin McDonald acknowledged that there was robust 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 satisfy 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 development in these areas:

Males’s Attire 
E-commerce
Worldwide web income: Worldwide income at the moment 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 unhealthy information, Lululemon introduced the departure of its Chief Product Officer, Solar Choe. In accordance to some stories I learn, Choe was a driving power 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’d look like time to deploy Warren Buffet’s well-known recommendation of “purchase an excellent firm at a great value.” However, I don’t assume this is applicable to Luluemon inventory proper now. I imagine that there’s draw back potential forward for Lululemon thanks to a few threat elements.

Danger #1 – Elevated Competitors

Years in the past, Lululemon was just about alone within the athleisure house. This wasn’t all too stunning, because the firm primarily created athleisure. Positive, you would argue that Nike (NYSE: NKE) or Adidas (OTCMKTS: ADDYY) have been semi-competitors. However, Lululemon was all the time in a vastly completely different house 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 shortly coming to an finish. Immediately, Lululemon faces steep competitors from corporations like Alo, Vuori, Health club Shark, Fabletics, and lots of smaller manufacturers. Granted, none of those corporations have grown to the dimensions of Lululemon (but). However, they’re all nonetheless formidable opponents:

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 development). For what it’s price, I (a 28-year-old male) personal garments from each manufacturers and like Vuori for a handful of causes.
Alo: Alo is price an estimated $10 billion. It gained reputation due to its savvy influencer-first strategy to advertising and marketing.
Fabletics: Fabletics thought of an IPO in 2021 that might have valued it at $5 billion. I couldn’t discover any numbers more moderen than this.
Gymshark: Gymshark is valued at slightly below $2 billion. It’s additionally based mostly in the UK which might hinder Lulu’s worldwide growth plans.

With a market cap of slightly below $40 billion, these corporations 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 identify in high-end athletic attire. Immediately, there are many locations the place prospects should purchase a $128 pair of leggings or pants. Two of those rivals (Vuori and Gymshark) additionally function in verticals that Lulu is seeking to for development.

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:

Gymshark: 7 million followers (Gymshark Ladies has 3.5 million)
Lululemon: 5 million 
Alo: 2 million 
Fabletics: 2 million
Vuori: 1 million

For those who’re pondering of shopping for Lululemon inventory, you need to take into account how this competitors might eat into Lululemon’s development 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 received’t benefit from the monopolistic place that it had over the previous 12 months. Loads of former-Lulu male prospects might begin choosing Vuori whereas abroad athletes might select Gymshark.

Danger #2 – Dupe Tradition 

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

The price of dwelling within the US has risen dramatically up to now few years. In response, US shoppers are turning to dupes greater than ever. In Lululemon’s case, extra persons are shopping for off-brand yoga pants for $40 as an alternative of shelling out $128 to purchase Lulus. For those who seek for #Lululemondupe on TikTok, you’ll see tons of movies on the topic that routinely get thousands and thousands of views. I additionally took a take a look at Google Developments 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 cope with dupes. In truth, most high-end manufacturers can count on their merchandise to get copied. For instance, Nike (Nasdaq: NKE) has all the time had a problem with pretend Air Jordans nevertheless it has by no means appeared to harm the corporate’s income.

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

Danger #3 – Gen Z’s Saggy Pants Development

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

 A 5-year Google Developments chart for “saggy 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 means out whereas overly saggy clothes is in. I scanned Lululemon’s web site and didn’t discover something that appeared 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 customers. If this doesn’t change, I wouldn’t be stunned 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 many others). That stated, trend tendencies range by area and might change shortly. 

That is admittedly the weakest threat on this record. However, it’s nonetheless a possible threat 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 couple 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 development (males’s put on and worldwide markets). The inventory has additionally been getting punished to date this 12 months, which is an indication that investor sentiment has modified for Lululemon – maybe the hardest impediment to beat. 

I don’t essentially assume that Lululemon inventory will tank over the approaching months. However, it’s probably that Lulu will underperform the market or at finest break even. Even when Lulu hits its aim of 10% income development in 2024, I don’t see traders getting significantly excited. 

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

I hope that you just’ve discovered this text beneficial in the case of discovering whether or not or to not purchase Lululemon inventory. For those who’re interested by 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 creator, Ted Stavetski, just isn’t a monetary advisor.